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Stop Checking Your Portfolio: How to Invest for the Long Term During a Market Crash

By Alex Carchidi - May 23, 2021 at 6:15AM

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Crashes aren't very frightening if you're mentally and financially prepared.

If you're a bit too glued to the prices of your stocks or cryptocurrencies on a regular basis, you already know that there's nothing that commands your attention as powerfully as a crash. Still, market crashes are no excuse for impulsive investing. Your future self is counting on you to make rational and calculated decisions with your wealth.

Of course, in the present, it's easy to fumble that responsibility by focusing too much on the short term. And in a crash, it's perfectly understandable to do so. So, for your portfolio to succeed in the long term, it's critical to have a strategy for keeping your eyes on the prize rather than the shiny objects that are more immediate (like a market crash).

A stressed investor drinks tea at a cafe while working with a laptop computer.

Image source: Getty Images.

Plan ahead

The best way to reduce crash anxiety and compulsive stock price checking is to have an investing plan that you stick to. 

To plan ahead, figure out when you'll need the money in your portfolio. If you'll need the money in the next five years, you should take pains to diversify your investments into a mix of the stablest stocks, bonds, and cash to reduce your exposure to risk as much as possible, even if it means losing out on some upside. As an example, dividend paying stocks like Johnson & Johnson (JNJ 0.61%) or Abbott Laboratories (ABT 0.06%) are good options.

In this context, investing for the long term means surviving today to make it to the long term. If a crash happens, you'll preserve the majority of your capital, and it'll be there when you need it. You'll get the added benefit of not needing to check on your holdings, as fluctuations in the market won't impact their value very much. 

On the other hand, if you don't plan on needing the funds anytime soon, it's OK to get more aggressive with the weighting of your portfolio. Understand that the prices of these riskier equities are more likely to swing wildly, for better or for worse. Invest in a selection of growth stocks and perhaps even a few speculative buys. Personally, I do most of my speculative investing into biotech stocks like Jounce Therapeutics, but most growing industries will do the trick. For each stock, stop and appreciate why it's worth owning, and what would make that thesis change in the future.

Then, keep a watchlist of stocks that you'd be interested in buying for a long-term hold if they were at the right price. Be sure to fully articulate why you think the stocks are worth buying after a sharp fall, but not at their present price. The trick with watchlists is to set up an alert so that you get a notification when a stock's price drops significantly. That way, you won't need to anxiously spend time monitoring your watchlist when the market gets turbulent. Just set up the alert with your broker or news service and wait patiently for months or years, preferably while doing something interesting in the meantime. 

Draft these plans when the market is calm. And be sure to keep plenty of cash on hand. There's no point in keeping a crash-ready watchlist if you don't have the liquid funds or mental fortitude to purchase the stock when it's at a discount. 

Don't panic sell

Even if you've planned ahead, seeing an ocean of red numbers in your portfolio during a market crash will likely ignite an urgent sense of doom. Each time the price updates, your lizard brain will be screaming at you to sell your biggest losers to avoid them dropping even more while promising you that your anxiety will be eased as soon as they're off your hands. This is the hardest part: You have to sit with the discomfort, and do nothing.

There's a time for trimming your holdings and rebalancing them such that your portfolio is packed with healthy stocks and unencumbered by chronic underperformers. It isn't during a crash. By selling during a freefall, you're opting to permanently lock in your losses in exchange for a fleeting sense of relief. It's the opposite of investing for the long haul, because it's entirely centered around the events of one day or one week -- events that almost certainly have nothing to do with the strength and quality of the businesses that underpin your stocks. For instance, it's very hard to believe that the revenue-making potential of a massive multinational corporation like Johnson & Johnson or Abbott Labs could be severely impacted by the goings-on of a single day.

In other words, if you have a long term investing thesis for a stock in your portfolio or on your watchlist, nothing about that should change if there's a crash. And if no competitive factors are changing while your financial goals remain constant, you don't have the rationale that's necessary to justify selling. 

Realize that looking at the numbers doesn't change them

No matter how prepared your portfolio is, you're not an active force in its present performance when the market is collapsing. And, if you set up your watchlist and alerts properly, you'll know when opportunity is knocking in terms of influencing its future with a fruitful purchase or two. Until then, you're free. There's no benefit to watch the losses mount, as perversely addictive as it may be. 

If you really feel like you have to do something, try revisiting the stocks in your portfolio and your watchlist and recalling why they're worth holding or potentially buying. That'll help you to avoid panic selling, and it'll also increase your confidence in purchasing a stock that's just dropped a significant amount. But from a practical standpoint, the best thing to do when the market is collapsing is to turn off the computer and take a long stroll outside.

Alex Carchidi owns shares of Abbott Laboratories and Jounce Therapeutics, Inc. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$167.11 (0.61%) $1.02
Abbott Laboratories Stock Quote
Abbott Laboratories
ABT
$111.97 (0.06%) $0.07
Jounce Therapeutics Stock Quote
Jounce Therapeutics
JNCE
$4.75 (-2.50%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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