Market crashes happen. It's part of the market cycle, and no matter how investors and policy leaders try, it has been impossible to avoid.
The market is down big in 2022, but we haven't seen a crash that causes panic to set in. Here's what you need to avoid if, or when, eventually the market does crash.
Image source: Getty Images.
Don't: Panic
We preach buying quality companies and holding them long-term. If that's your investing mindset, there's no reason to panic in a downturn.
Let me give an example. Between the start of 2008 and March 1, 2009, Apple stock dropped over 50%. The iPhone was out and it was a hot product. The company was profitable, but investors didn't care. They were selling everything. Panic was in the air.
What would have happened if you held Apple through 2008 and 2009 until today? The drop in 2008 and 2009 is almost invisible in hindsight.
It's OK to sell a stock if your investment thesis changes or if the company is fundamentally struggling, but panic is a terrible reason to sell. Avoid panic at all costs.
Don't: Use leverage to "make it all back"
It can be tempting to use leverage to make back losses. Margin is available in some accounts, and so are options, which are a leveraged bet on a stock going up or down. But leverage can make problems worse in a stock market crash.
Keep in mind a couple of things:
- No one can predict the bottom of the market, and with leverage there's risk that the market will go lower, wiping out even more value.
- Leverage has costs, whether it's paying for a margin loan or the lost time value in an option.
- Just because something is down doesn't mean it'll go back up.
It can be easy to anchor on an old stock price and think that a stock will get back to its old high eventually. Sometimes it does, but other times it doesn't. Leverage can ruin a portfolio, so take a long-term view and buy and hold great companies without levering up the portfolio.
Don't: Be stubborn
When the stock market crashes, it can lay bare a lot of risks that are easy to paper over when the market is going up. That's why investors need to continue evaluating their investments in a down market and not be stubborn with their investment thesis. This is something I often have to remind myself of.
For example, many growth tech stocks are down big right now, but did they deserve the high valuations they had during the peak of the market? In some cases, the answer is "no" and we need to reevaluate the company.
I'm doing this with stocks like Asana and Matterport that I liked because of their growth, but that haven't proven the ability to make money. If they can't turn operations around quickly, I'll need to sell because my investment thesis will be fundamentally changed.
It's easy to be stubborn about what you think a company is worth or where a stock is going, but in a market crash we need to check to see if anything in a business is fundamentally broken.
How I survive a market crash
In more than 25 years as an investor, the simplest trick I've learned in good times and bad is to not check my portfolio. The day-to-day moves aren't important, so I don't need to know what's happening on an hourly or daily basis. I'll check every few weeks to make sure everything is there and see if there's anything that I may need to reevaluate, but that's about it.
In market crashes like 2008/2009 and 2020, simply not checking your brokerage account and coming back to it when the market settles down would have been better than panicking over daily price moves. And your mental health will be better without the market's daily stress.
