If the market crashes, don’t make your problems worse.
Market crashes occur. It is part of the market cycle and no matter how investors and policy makers try, it is impossible to avoid it.
The market fell sharply in 2022, but we haven’t seen a crash that caused panic. Here’s what to avoid if, or when, the market eventually crashes.
Do not panic
We preach to buy quality companies and keep them for the long term. If that’s your mindset as an investor, there’s no reason to panic in a downturn.
Let me give you an example. Between early 2008 and March 1, 2009, Apple stock fell more than 50%. The iPhone was out and it was a hot commodity. The company was profitable, but investors didn’t care. They sold everything. Panic was in the air.
There’s nothing wrong with selling a stock when your investment thesis changes or when the company is in fundamental trouble, but panic is a terrible reason to sell. Avoid panic at all costs.
Don’t: Use leverage to “get it all back”
It can be tempting to use leverage to offset losses. Margin is available on some accounts, as are options, which are a leveraged bet on a rising or falling stock. But leverage can exacerbate problems during a stock market crash. Note a few things:
No one can predict the bottom of the market and with leverage there is a risk that the market will go down and destroy even more value.
Leverage has a cost, whether it’s the payment of a margin loan or the lost time value of an option.
Just because something is going down doesn’t mean it will go up.
It can be easy to get anchored to an old stock price and believe that a stock will eventually return to its old high. Sometimes yes, but sometimes no. Leverage can ruin a portfolio, so think long term and buy and hold big companies without leveraging the portfolio.
No: Be stubborn
When the stock market crashes, it can expose many risks that are easy to ignore when the market goes up. For this reason, investors should continue to evaluate their investments in a bear market and not get stuck with their investment thesis. I have to remind myself of this often.
For example, many growth tech stocks are currently down sharply, but do they deserve the high valuations they enjoyed during the market peak? In some cases the answer is no and we need to reassess the business.
I do this with stocks like Asana and Matterport, which I liked for their growth but haven’t proven they can make money. If they can’t turn the deal around quickly, I’ll have to sell because my investment thesis will fundamentally change.
It’s easy to be stubborn about what you think a company is worth or where a stock is going, but in a stock market crash we need to check if there is something fundamentally wrong with a company.
How to survive a stock market crash
In over 25 years as an investor, the simplest trick I’ve learned through good times and bad is not to review my portfolio. Daily movements aren’t important, so I don’t need to know what’s going on every hour or every day. I’ll be checking every few weeks to make sure everything is in place and to see if there’s anything I might need to reevaluate, but that’s about it.
During stock market crashes like 2008/2009 and 2020, it would have been better to not check your brokerage account and come back to it when the market calms down rather than panicking about daily price movements. And your mental health will be better without the daily stress of the market.