Ride Out The Storm: What To Do When The Stock Market Crashes
A few weeks ago, I shared these two blog posts with you:
- “The Big Picture” by Ray Dalio (May 12th, 2017)
- “Great News: There’s Another Recession Coming” by Mr. Money Mustache (June 20th, 2017)
Both these gents have taught me A LOT about finance. So when they talk, I listen.
It seems they both agree on one thing; everything looks dandy (for now), but soon the stock market will crash.
No one knows for sure (it’s impossible to make an exact prediction). Somewhere within the next two years or so is my best guess.
What Does This Mean?
The Financial Crisis of 2007–2008 was a storm of unemployment, foreclosures, evictions, and businesses/ individuals going bankrupt.
However, if (like me) you’re in your 20s, chances are the cozy comfort of a classroom kept you sheltered from it all.
For most of us, this means whatever’s coming will be our first opportunity to experience a crash in the real world!
Should you be scared? Nope.
Not if you’re prepared.
“By failing to prepare, you are preparing to fail.” — Benjamin Franklin
This letter will help you prepare.
So let’s get going.
Step 1: Things To Do Before The Market Crashes
1. Expect It
I’ll talk more about this in a later letter.
For now, all you have to know is that these crashes are to be expected! Every few years the stock market will go down a lot.
Here are the 5 most recent Bear Markets*:
*A Bear Market is when the stock market goes down 20% or more.
- Black Monday (Aug 25th, 1987 to Dec 4th, 1987) the stock market went down -33.51%.
- Dot-Com Bubble (Mar 24th, 2000 to Sep 21st, 2001) the stock market went down -36.77%.
- Stock Market Downturn of 2002 (Jan 2nd, 2002 to Oct 9th, 2002) the stock market went down -33.75%.
- Financial Crisis of 2007–2008 (Oct 9th, 2007 to Nov 20th, 2008) the stock market went down -51.93%.
- 2009 Bear Market (Jan 6th, 2009 to Mar 9th, 2009) the stock market went down -27.62%.
See? Normal. You’ll experience several in your lifetime.
Now you know. Now you can expect them and prepare.
2. Don’t Just Own Stocks
I talked about this in my portfolio letter.
When stocks go down, Bonds will keep you safe. Hence why I recommend having 10–20% of your portfolio in Bonds.
Secondly, your stocks will go down a lot during a crash.
This is perfectly fine.
Why? Because every stock will go down a lot during a crash!
This is a great opportunity for you to buy more. Hence why I recommend having 5% of your portfolio in Cash.
3. Have a Backup Plan
If the stock market goes down, most businesses will make less money.
If most businesses make less money, they won’t afford to pay every salary.
If businesses can’t pay salaries, many many people will be unemployed. Don’t be one of them.
If you’re an employee, make sure you know people who own or work for a business that could hire you if things go bad.
Of course, I always recommend having more than one source of income.
It’s not good to have your livelihood depend on one thing outside of your control.
“Two is one and one is none.” — Navy Seals saying
4. Have No Debt
If you owe money before a crash, I have bad news.
Things won’t get any easier. Especially if you lose your job (which happened to millions of people from 2007 to 2009).
This is why I always recommend killing your debt.
Step 2: Things To Do After The Market Crashes
1. Be Thankful!
Ironically, bad times are the best times for early investors AND early entrepreneurs.
The best time to put money in the stock market is when it crashes.
Because things can only go up from there!
Coincidentally, one of the best times to start a business is also when the market crashes.
After studying 84 $1 Billion companies (what’s now fancily called “Unicorns”), TechCrunch concluded: “The best times to start a unicorn company could be a) post the launch of a watershed new tech platform; and b) during a prolonged public market downturn. Without many great jobs available, the reduced opportunity cost and related hardship may spawn great innovation and grit.”
Seize the opportunity!
2. Adjust Spending
Tough times? Go stoic.
Luckily, we covered how to do this before.
3. Buy Stocks
Again, the best time to buy stocks is when pessimism is highest.
Don’t believe me? Look at this graph (gotten here).
This is a study published every month by the University of Michigan.
All they do is interview 500 people and ask a few questions to see how “confident” they are in the stock market.
Why is this important? Because when consumer sentiment decreased by more than 60%, the next 12 months saw great increases!
See the graph below (gotten from this book) to see how much you would have made if you invested when people were most pessimistic:
“Be greedy when others are fearful.” — Warren Buffett
4. Buy All The Things You Want
Want a new house? A Tesla? Or an iMac?
The best time to buy all those things is after a big market crash.
Why? Because when times were good, chances are many people bit off more than they could chew.
Therefore, when things go bad, they rush to sell their stuff.
- That’s when you go on Zillow find your dream house.
- That’s when you go on CraigsList look for that Tesla you wanted.
- That’s when you go on eBay look for that sweet iMac Pro.
Don’t buy things when you want them, buy when the opportunity is right.
5. Do Not Sell
Don’t. Sell. Anything.
If you’ve done things right, you won’t need to sell assets during a stock market crash (unlike many people).
Prices will go down a lot. So you’ll make far less money on whatever it is you’re selling.
Don’t do it.
Most importantly, DO NOT SELL YOUR STOCKS.
Your psychology is your portfolio’s worst enemy.
People freak out when they watch their stocks go down. So what do they do? They sell.
This is the worst thing you can do! Remember, when you buy an index fund, hold it for 30+ years.
I know I’ve repeated this a lot. But it’s worth re-emphasizing over and over again.
“How do I feel when the market goes down 50%? Honestly, I feel miserable. I get knots in my stomach. So what do I do? I get out a couple of my books on ‘staying the course’ and reread them!” — Jack Bogle
And that’s it for today!
Today, we learned what to do BEFORE the stock market crashes:
- Expect it
- Don’t just own stocks
- Have a backup plan
- Have no debt
And what to do AFTER the stock market crashes:
- Be thankful!
- Adjust spending
- Buy stocks
- Buy all the things you want
- Do not sell
See you next week (follow the series here to be notified).
Thanks for reading! 😊 If you enjoyed it, test how many times can you hit 👏 in 5 seconds. It’s great cardio for your fingers AND will help other people see the story.
Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.