How to Weather a Market Crash

Many people have an idea of investing in stocks that sounds like this:

  1. Buy stocks, preferably at a low price.

  2. Sell if you think prices are going to drop.

  3. Buy everything back after prices have fallen, but before they start rising again.

  4. Repeat steps 2 and 3 until you retire.

The problem with this strategy is that you'd need to be able to consistently predict the future in order to pull it off. A lot can change in six weeks. We're suddenly experiencing one of the worst financial crises in modern history. To make matters worse, our daily routines have been upended and it seems like our very way of life has changed overnight. It's a scary time for everyone. After one of the longest bull markets in history, it was a lightning-fast turnaround to bear market territory. The markets seemed to be in free-fall at times. Whenever stocks fall so far and so fast that the New York Stock Exchange hits its circuit breaker and shuts down during trading hours, you know it's bad. When it happens four times in 10 days, that's not just bad -- it's unprecedented. Long-time investors are reliving painful memories of the market crashes of 2008, 2001, and 1987. Anyone who started investing in the last 10 years is experiencing their first crash, and it's a big one. The message I have for DIY investors is the same one I have been giving my clients.

Hang in there. If you are still employed or if you have enough cash on hand to pay your bills for the next few months, stick with your plan. If your circumstances are different today than they were two months ago and you need money, that's a different story. If you've lost your job, you'll need to re-evaluate. If you don't have enough cash in your emergency fund, then pick the investments in your portfolio that you think are the most troubled and move them to cash.

But don't sell just to stop the anxiety that comes from watching prices fall. I've heard many horror stories from investors who sold during the Great Recession. They couldn't take it, and they got out. They planned on buying again after prices had bottomed out, when things were safe again. I completely understand the rationale and emotion behind this. But the vast majority of the times those folks sold at the bottom, they never got back in. That's how people lose half their portfolio - by not ever giving themselves the chance to gain it back. But I don't want to only tell you what not to do. I also want to give you some ideas about what you can do.

Below you will find my list of "15 Things to Do Before You Abandon the Stock Market." I hope it helps.

How to Weather a Market Crash

There is very little in investing that’s harder than watching prices collapse. Believe me, I see the same numbers you do. Last month I was on the phone nearly all day, every day, giving people my thoughts on why we should stick with one fundamental investing plan instead of cutting bait and moving everything to cash. I firmly believe that if you have a portfolio of high quality assets, doing nothing is often the best response to market volatility, even during the most extreme downturns. But when it comes down to it, every investor needs to make this decision for themselves, after looking at all the options. Stocks are for long-term money. Instead of going to cash, these are tasks you can accomplish in the short-term to improve your overall financial position without sacrificing long-term growth.

15 Things to Do Before You Abandon the Stock Market

  1. Commit your budget to writing.

  2. Figure out how many months' worth of expenses you have on hand in cash.

  3. Figure out how many months' worth of expenses you have in bonds, for when your cash runs out.

  4. Renegotiate your credit card debt.

  5. Refinance your student loans.

  6. Refinance your mortgage.

  7. Get a HELOC.

  8. Look at the top 10 holdings for all of your mutual funds.

  9. Calculate the dividends and interest currently produced by your portfolio.

  10. Read Warren Buffett's most recent letter to shareholders.

  11. Read Jeremy Grantham's Reinvesting When Terrified.

  12. Ask five people you trust what they did in 2008-09 and how it worked out for them.

  13. Figure out the rate of return you want to have for a comfortable retirement.

  14. Write down five companies you think will be wildly successful five years from now.

  15. Write down a plan for how and when you'll get back into stocks.

After you do this simple homework, you'll have more clarity on what to do next, and you'll be certain that you made the decision with your brain and not with your gut.

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