5 Things Experienced Investors Know About Surviving a Stock Market Crash


You have seen this movie before. And even if you are too young to remember you vividly remember your parent’s screams. Yes, the stock market is crashing and you are paralyzed with fear.

All that hard earned money you invested and puff, it’s all gone. Maybe not quite an Animal House “7 years down the drain” situation, but still a lot of it is gone. With it, there goes your worth as a human being.

It all happened in the blink of an eye. One minute you had visions of a life of riches — a red Ferrari, original artwork decorating the walls of your new penthouse apartment, and weekends shuttling between the Hamptons. and South Beach for a life of pure pleasure.

Waking up to a market mess really hurts. Reality bites! Not only do your dreams feel so far out of reach now, but what really upsets you is that you would have been better off spending all that money you invested on a fun trip to Vegas. Come to think of it, maybe Vegas would have been a better gamble!

Live and learn. That’s the last thing you want to hear, but you know that it is true. If you are going to invest you need to understand that stock market crashes are as inevitable as the New England Patriots making yet another Super Bowl.

I understand that you (like most of the country) may hate the Pats, but maybe the lesson is that experienced investors know something about surviving a stock market crash that you could really benefit from, but only if you are able to see through your fear.

“Everything you’ve ever wanted is on the other side of fear.”
- George Addair

Before you jump off the cliff keep these things in mind:

#1: It won’t always be so dark at 4 PM

Stock markets tend to go up over time. The average annual rate of return on the S&P 500 is 10% over the 1926–2018 period.

10% is a pretty good return that compounds year after year. Some years are much better and some are much worse.

The problem is never when things are going well. The problem is always when the stock market tanks and everybody assumes the end of the western world.

Your reptilian brain goes into an immediate red alert state. It assumes that nothing good can result from this stock market turmoil. It’s telling you to get out now!

The problem is that as sure as day follows night, history shows that stock markets recover from crashes to resume their upward growth.

That crash that was so feared at the time will likely look like a mere blip on the long-term historical price chart.

Crashes and corrections (smaller mini-crashes) make us feel terrible but are part of investing. Research from data provider Factset shows that historically the US stock market has had a correction of 10% or more in 55% of the years.

Experienced investors bear the scars of prior stock crashes. They also understand that while bad times are more frequent than anybody would like, these bad times do not last forever.

Experienced investors understand that markets are volatile but that over the long-run stocks are incredible wealth creation machines.

#2: You can’t score from the bench

Fleeing the markets at the first sign of distress does more harm than good. Stock markets are inherently volatile and you might as well get used to it if you call yourself an investor.

If you don’t put money at work in the stock market you can’t lose any money, right? Correct, but the flipside is that when stock markets go up you will be squirming in your Lazy Boy as all your friends hoot and holler about their stock portfolio gains.

Only by playing can you make a difference. Put money at work in the stock market and you will participate in the ups and downs of investing. The good news is that historically there have been many more ups than downs.

You can always play it safe and keep your money under your mattress but that safety is going to cost you manifold over the long-term.

Let’s play a little historical game. If you had invested $100 at the end of 1927 how much would you have at the end of 2018? $10,000, maybe? $25,000? Not even close!

If you invested in US stocks you would have $382,850. And that is after “surviving” several stock market crashes! Not bad, right?

But what if you were really cautious and stayed out of the game? Let’s say that you invested all $100 into US treasury bills. You know that unless the US government defaults you are getting your money back plus interest.

How much would you have at the end of 2018? Are you ready?

You would have a grand total of $2,063 according to the calculations of Dr. Aswath Damodaran at NYU.

Your caution has cost you dearly. Hot dogs or steak? Which one would you choose?

Experienced investors know that when things get really uncomfortable the only objective at the time is to stay in the game.

If you are not in the game, there is a zero percent chance of making up your losses and you surely will not participate in the good times.

The opportunity cost of not playing is high.

Photo by Joao Tzanno on Unsplash

#3: Nobody plays the perfect game anyway

When the s..t hits the fan (and it does for everybody) your first reaction might be to sell everything in disgust.

Apple, Proctor and Gamble, Netflix, Gamestop, those tiny speculative biotech’s that were going to make you rich — all sold with a vengeance. Good riddance. You are done with stock investing!

The problem with this approach is that you are likely “throwing out the baby with the bathwater”. You are letting your emotions run the show. You are not looking at the merits of the situation.

An experienced investor re-evaluates every holding based on their merit at that particular point in time. Sure, market conditions suck and losses are piling up. But remember these are only paper losses until you sell for real.

Maybe this stock market sell-off is pure panic and unrelated to economic fundamentals. Investors often behave like a herd of wimps all climbing over each other trying to be first to sell. An experienced investor will not panic and likely will watch the stampede from afar. Steady Eddie.

Other times something in the markets or economy has fundamentally changed and some of the stocks in the portfolio are no longer worth their original value.

What do you do?

Option A: Hope that the markets recover and then hope to find somebody that will take the stock off your hands?

Option B: Sell now because you guess things will get worse and your money could be best used somewhere else?

Option A is based on hope. Option B is based on research and the merits of the situation.

An experienced investor will not rely on hope. They will most likely face up to the fact that some of their stocks are no longer worth what they originally thought and that they need to sell.

Nobody likes to sell at a loss, but better to sell for 80 cents on the dollar than for 50 cents down the road. There is no shame in taking a loss if it furthers your cause in the long-term.

#4: Don’t listen to your gut when everybody else is throwing up

Fear is paralyzing. Fear leads to making poor decisions if left unchecked. But fear can also be used as a signal for taking conscious action.

You can use fear as the catalyst for triggering a course of action that, while difficult at the moment to execute, will bear fruit when everybody else is still lamenting their bad luck.

Experienced stock investors use the extreme fear of market investors as a wakeup call to pay attention.

If the mass hysteria is based on pure crowd psychology and not economic fundamentals, the wise know that money can be made at the expense of the fearful.

Planning ahead of time is crucial.

What can you do to take advantage of the fear of others?

  • Having enough cash on hand to fund the purchases — without cash, you can’t do anything. Borrowing to leverage during a period of stock market distress is not a reasonable or smart option. Just say No!
  • Having an idea beforehand what to buy from the weak hands. This is all about research. Focus on investments where even if you are a bit wrong in your assumptions of future growth and profitability there is a good chance of making money — Warren Buffet calls this his margin of safety. Buy the babies thrown out with the bath water!
  • Internal fortitude or “cojones” if you know what I mean. Departing from the herd mentality of doom and gloom is very difficult. Almost all inexperienced investors will flee at the first sign of trouble. Standing apart from the hysteria of the crowd takes belief and conviction.

Experienced investors understand that fear needs to be managed, not avoided.

Photo by Guilherme Stecanella on Unsplash

#5: When you are seasick focus on the horizon

Have patience. You never know how long markets will remain in a downtrend so be prepared for the long haul.

Most stock crashes and corrections are short-lived. If you knew that a correction or crash was about to happen you would bail in a hurry, right?

But the timing of when things fall apart is never known with any certainty. Many stock pundits have proclaimed an imminent collapse only to find themselves years later staring at a stock market twice as high as before. [Hard Fact — Nobody can time the next market crash]

Research by Factset shows that the average length of time from collapse to full recovery is 9 months after a 10% or more correction. That is not that long, but you would be surprised by how many inexperienced investors lack patience even if it means locking in a major loss.

In a sense, patience is a function of belief. Belief, in turn, should be informed by history and the context in which you are making decisions.

If you understand the history of stock market returns you would think twice about bailing when things get dicey in the short-term.

If you understand the history of global economic growth you would realize that business cycles — boom and bust periods — are part of our system of capitalism.

Experienced investors know exactly why they are investing in the stock market. You need to do the same.

What matters to you?

  • Growing your portfolio so that you can at some point in the future enjoy the things in life that make you happy?
  • Or, attaining immediate relief from the pressure that comes from stock investing and hiding under your comforter until everything becomes easy again.
“By re-educating the mind you can accept fear as simply a fact of life rather than a barrier to success”
- Susan Jeffers
Photo by Andre Ouellet on Unsplash

It might be your first rodeo but you don’t need to stay down

Your fear is real. Nobody (except those braggy people with nothing at stake) likes a stock market crash.

You and your friends were enjoying the party and suddenly, swish, they turn the lights off and you can’t find your wallet or your dream date. How will your life ever be good again? No more Hamptons or South Beach.

Maybe all those people that have been whooping it up paycheck to paycheck had it right after all.

Fear is paralyzing. Everybody experiences the same thing. But only a few know what to do about it.

The fear when in a stock market crash is real but if you are able to overcome the signal that your nasty brain keeps sending to your sweaty palms, you are going to see daylight again and prosper.

Fight the fear knowing that experienced investors have found ways to survive market meltdowns. This might be your first rodeo, but they are still saddling up after many falls.

Go deep into your head. Remind your rational brain that things will get better and that everybody is going through the same negative emotions. Think clearly and if need be cut your losses, but whatever you do don’t beat yourself up.

Learning from the experience of others is a time-tested approach. This won’t be your last rodeo. Get up on the horse and next time around you will know how to conquer your fear. You may even profit from the fear of others.

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