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3 Secrets to Survive the Next Stock Market Crash

By Barbara Eisner Bayer, Chuck Saletta, and Eric Volkman – Updated Jun 15, 2021 at 5:49PM

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The next stock market crash is inevitable; here are three tips to prosper when it arrives.

Have you been reading the financial news lately? If so, you know what the pundits are saying: A stock market crash/correction is coming. Yikes!

The truth is, stock market corrections are a normal part of the investment cycle. As our colleague Sean Williams writes: "At no point over the past 60 years has there been a bear market that didn't correct between 10% and 19.9% at least once within three years of hitting a bottom. We're now more than 14 months removed from the March 2020 bottom and have yet to see a double-digit percentage retracement in the benchmark S&P 500." So you have to believe a correction is imminent.

There's good news about these crashes, though: The stock market has always roared back to even higher highs, which is good news for investors who know the secrets to prospering in the market, even when the bear is striking. Below, three Motley Fool contributors share their secrets to surviving -- and thriving -- when the next correction occurs.

Scared person sitting in arm chair holding onto money.

Image source: Getty Images.

Get paid while others panic

Eric Volkman: My suggestion is a straightforward one: Put capital into good dividend stocks (or hold on to the ones you already have).

The better and more reliable dividends are almost always that way for one big reason -- they're from companies that have proven over the years that they can make money even during the bad times. Economies ebb and flow, markets boom and swoon; the best businesses have the resources and the capability to survive these lurches, which always come sooner or later. 

Much of this is about resources, namely cash. A business that can regularly produce piles of the green stuff is in an ideal position to fund a healthy dividend and to at least sustain it during the lean times. Strong cash generators tend to be businesses with products that enjoy sustainable demand from their customers, and ideally sell their products at better-than-average margins.

A classic example of this we're all familiar with is Microsoft (MSFT -0.20%).

For any PC user, Microsoft products are nearly unavoidable -- when was the last time you used a PC without Windows, after all? And while the company periodically tweaks and updates Windows, the costs of this maintenance and development are peanuts compared to what it has historically charged for it. Microsoft is a profitable, cash-amassing monster; this dividend stock is a fine stock market crash hedge.

Numerous other examples abound. One obvious place to look for stars in this galaxy is the list of Dividend Aristocrats. This is the exalted group of S&P 500 index component stocks that have raised their shareholder payouts at least once per year for a minimum of 25 years running.

While some Dividend Aristocrats are better investments than others, all have proven to be resilient, and many will provide good shelter in a market crash. There are plenty of solid companies to choose from.

Target (TGT -2.56%) would be one of my picks, as it's an exceptionally well-managed business that's a go-to retailer for millions of American shoppers. Many investors feel the same about Walmart (WMT 0.96%).

Aflac (AFL -1.66%), meanwhile, has a strong niche in supplemental insurance products. And even in market crashes and through economic recessions, we'll still be buying spices and condiments made by comestibles mainstay McCormick (MKC -0.88%).

There are, of course, plenty of quality dividend stocks that aren't Aristocrats. I'm thinking, in particular, of real estate investment trusts (REITs), which are obligated to pay at least 90% of their net profits out as dividends. Many other companies across a variety of sectors are also fine dividend plays.

There are plenty of places on the market to look for these, and it's rewarding -- and potentially very lucrative -- to find them.

Person with armful of piggy banks.

Image source: Getty Images.

Get your greed on

Barbara Eisner Bayer: Billionaire investor Warren Buffett gave the best advice of all (and one of his big secrets) in his 1986 letter to Berkshire Hathaway shareholders: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." That advice will serve you well during a market crash.

You'll often hear that the trick to stock market success is buying when equities have plummeted and selling when they're frothy. Sure, that's great advice, but how do you know when that occurs? The truth is that no one can time the market, and if you try to, you'll quickly discover firsthand that it's almost impossible -- especially if you wind up losing money by trying to trade stocks. No one knows when a stock is reaching extremes in either direction.

However, during a stock market crash, you have a great opportunity to purchase stocks that could be 10% to 30% or more off their highs -- and you can grab some great companies at a relatively low price. But there are two things an investor must have to make that happen.

First, you'll need cash in the bank. Not the cash that you need to pay your monthly bills (see Chuck's section below), but money above and beyond that so you can buy crash-created bargains. Always have on hand a list of great companies you'd like to buy. Then, when the bottom temporarily falls out of the market, you'll have the funds necessary to scoop them up.

The second thing you'll need is courage. It takes a strong stomach and great confidence -- both of which Warren Buffett possesses -- to pull the trigger on buying stocks when the market is tanking. This is especially true when you purchase a stock and it continues to drop lower. But remember, you can't time the market, so you don't have to buy a company at its lowest lows -- just at a price that's reasonable, especially if the stock had been trading in nosebleed territory.

Opportunity costs money to capitalize on, but with cash in the bank and a stomach of steel, you can buy great stocks at low prices to hold for the long term. This way, you're almost guaranteed stellar returns when you decide it's time to sell.

Piggy bank wrapped in chains and surrounded by coins.

Image source: Getty Images.

Keep money you'll need soon out of stocks

Chuck Saletta: One of the most important differences between investing and gambling is that when you invest, you might be able to own your shares for many years. On the flip side, with most gambling, each deal of the cards or roll of the dice is generally a discrete win-or-lose event, and when you lose, your money is gone. That difference is crucial, because it means that when you're investing, you haven't permanently lost money just because your shares may be down a bit shortly after you buy them.

As Benjamin Graham -- the investor who taught investing to Warren Buffett -- famously said: "In the short run, the market is a voting machine but in the long run, it is a weighing machine." In other words, on a day-to-day basis, a stock's price may tank or soar, but over long periods of time, its price should pretty fairly reflect what the underlying business is really worth.

To get to that long-term value, you have to be willing and able to hold on to quality companies' shares through what could be significant short-term pain. If you need your money to cover your costs of living or some other high-priority expense, you simply can't hold on when the market moves against you. In addition, when you've only got money you won't soon need invested in stocks, it simply gets easier to be rational when faced with a market that's moving sharply against you.

With this in mind, a strong guideline to follow is that money you expect to spend within the next five years does not belong in stocks. Instead, for that near-term money, consider things like cash, money market funds, time-matched CDs, Treasuries, or investment-grade bonds.

If the market cooperates, you won't earn as much as you would in stocks. If the market turns sour, however, you'll have a much better chance of still having the money you need when you need it. That can make all the difference in the world when it comes to making smart decisions in the midst of a market crash.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Barbara Eisner Bayer owns shares of Berkshire Hathaway (B shares). Chuck Saletta owns shares of Aflac, Microsoft, and Target. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Microsoft. The Motley Fool recommends Aflac and McCormick and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$237.45 (-0.20%) $0.47
Aflac Incorporated Stock Quote
Aflac Incorporated
$56.83 (-1.66%) $0.96
Walmart Stock Quote
$131.31 (0.96%) $1.25
Target Corporation Stock Quote
Target Corporation
$148.71 (-2.56%) $-3.90
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$399,127.75 (-1.32%) $-5,357.50
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$264.32 (-1.29%) $-3.45
McCormick & Company, Incorporated Stock Quote
McCormick & Company, Incorporated
$75.36 (-0.88%) $0.67

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

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