There’s no sugarcoating it: Nobody truly likes to see the stock market go down. Your portfolio becomes a constant reminder of pain, tugging at every square inch of your emotions. You start rationalizing how to sell your stocks and wait for the selling to end. “I’ll just get back in for the ride up” are the famous last words of many retail investors.
The market is a daily compilation of knee-jerk reactions; there’s no telling how it might react to headlines or how long it will move in a particular direction before pivoting without warning. Still, many people try to outmaneuver the market, especially during down markets.
Do you want the real secrets to surviving a market crash? Here they are.
1. Take a long-term approach
Everything starts with embracing a long-term mindset to your investments. You need to mentally prepare yourself for the volatility that will probably show up at some point, especially if you are holding individual stocks. What’s “long-term”? Try to be prepared for a multiyear horizon when you invest because the market will go through ups and downs; there will be bull markets and bear markets.
You run the risk of driving yourself insane if you check your stock portfolio every day (sometimes every hour), wondering whether you should buy or sell based on what you hope the stock market might do next. The more you let that stress in, the more likely you are to try and trade around the market’s activity.
A study showed that roughly 80% of mutual fund managers underperform the S&P 500 over five years. Why? It could be because money managers are accountable to clients and their expectations and chase short-term returns to attract new investors. Don’t do this. Instead, think of each stock you own as a partnership with that company. Look at the company’s performance, management, and long-term goals. Don’t let the stock’s price tell you how to feel about it.
It’s common for stocks across the board to trade lower during a market crash — the baby gets thrown out with the bathwater, as they say. So use a crash as an opportunity to hone in on the unfairly sold gems.
2. Use dollar-cost averaging
Once you’ve identified a company you want to partner with (invest in their stock), please don’t throw a giant lump sum at it. This is just another form of trying to “time the bottom” in a crash. You might look at that stock that’s down 50% from its highs and think, “It can’t go that much lower.”
Oh yes it can. If a stock falls from $100 to $50 and you go all-in, what happens if it keeps falling to $25? The stock is down 25 more percentage points (75% versus 50%), but you’re down 50%. Some people call this “trying to catch a falling knife.”
Instead, consider a dollar-cost averaging strategy to build your positions. You invest set amounts of money every so often, slowly building a position. You may not time the bottom, but you will acquire more shares as the price falls, and you’ll help prevent emotions from tempting you into doing something foolish.
3. Avoid margin debt
Using margin, or borrowing funds to trade with, can be a deadly mistake in a market crash. Investors often get tempted into using margin because of the idea that they can supercharge returns, but in a crash, they can snowball your losses just as quickly.
The dirty secret of using margin is that if your account goes low enough, your stockbroker can perform a margin call, where they call your loan, requiring you to add funds on short notice. They could even begin selling your stocks for you without telling you first, forcing you to sell at potentially significant losses. A market crash is a lot less stressful when you don’t have to think about margin calls; it’s often best to avoid margin altogether.
4. Diversify your portfolio
You’ve probably heard the common wisdom of “don’t put all of your eggs in one basket.” This applies to investing; a market crash can bring down stocks across an entire portfolio, but stocks don’t always recover to their previous highs. A market crash sometimes shakes out low-quality and speculative stocks from the quality at the top of the barrel.
If you invest in individual companies, you’re not likely to pick a winner every time. At some point, the stock doesn’t work out for one reason or another. Having a diversified portfolio of stocks will help ensure that one miss doesn’t sink your whole portfolio.
5. Keep funding your account
Continuously funding your stock account can help remove a lot of stress during times like the past month and a half, when stocks seem to go lower every day. It can be challenging to decide whether it’s wise to sell a stock at a loss or after it’s given up significant gains to capitalize on another opportunity. You can use new funds to add to the stocks you believe in most or pay for new investments without disrupting your existing portfolio.
Sometimes, long-term investing is like cooking good BBQ; the less you mess with it, the better it tends to turn out at the end. Adding new funds to make new investments will help you shrug off the temptation to do too much trading.
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