3 Things You Shouldn't Do If the Stock Market Crashes

The S&P 500 dropped 20% in 2022. And if you've clicked on this article, then there's a good chance you're concerned about a comparable decline in 2023. That fear is legitimate -- there's plenty to be concerned about. But you and I can't control the economy or the market. We can only control our own actions.

My advice to you for a market crash is not my own. Rather, here's what investing greats Peter Lynch, Charlie Munger, and Warren Buffett would warn you not to do.

1. Don't be Nostradamus -- Peter Lynch

Nobody can predict interest rates, the future direction of the economy, or the stock market.

-- Peter Lynch

One of the greatest temptations investors face is trying to trade stocks by timing the tops and bottoms. Lynch says predicting anything in this realm is impossible.

I can prove Lynch's point. Consider that the Federal Reserve sets interest rates, and no one has a better, more informed opinion on the subject than the Fed chairman, Jerome Powell.

In Dec. 2020, Powell and the committee pledged to keep interest rates near zero until 2023, pleased with what they were seeing in the economy. Some investors undoubtedly tried timing some trades based on this information.

However, the Fed raised interest rates in 2022 faster than it ever has. And interest rates are now at their highest level since 2006 -- a far cry from the near-zero rate predicted by Powell.

Data by YCharts.

Fellow investing great Warren Buffett summed it up more illustratively by saying, "In the business world, the rearview mirror is always clearer than the windshield."

2. Don't panic -- Charlie Munger

If you're not willing to react with equanimity to a market price decline of 50% two or three times a century you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.

-- Charlie Munger

If there's any prediction that we can make, it's that there will be a market crash at some point. Just look at the chart below and count how many times the S&P 500 has dropped 20% or more from its high over the decades.

Data by YCharts.

Personally, I see four albatrosses around the economy's neck right now. Another crash might come in 2023, or it might come later. But whenever it does come, it's important to react with poise and calm.

Turning back to Lynch, he'd agree with Munger on this point. He said, "The real key to making money in stocks is not to get scared out of them." You see, stocks have an upward bias -- the longer you can stay invested, the better your chances of making money.

As author Morgan Housel writes in his best-selling book The Psychology of Money, "The historical odds of making money in the U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage."

3. Don't stop buying -- Warren Buffett

Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.

-- Warren Buffett

Patiently, calmly, and intentionally deploying money to buy stocks in great companies during down markets greatly increases long-term investing returns.

Consider that Amazon stock soared during the dot-com bubble and reached a split-adjusted price per share of $5.33 on Dec. 10, 1999. This was the worst possible moment of the bubble to buy. It wouldn't hit a new high until Oct. 23, 2009.

Data by YCharts.

If you invested $10,000 in Amazon stock on Dec. 10, 1999, you'd have about $11,007 on Oct. 23, 2009. However, if you invested $1,000 every year on Dec. 10 (to eliminate cherry-picking results), taking advantage of Buffett's "on sale" mentality throughout that lost decade, you'd have invested the same total of $10,000, but your returns would be drastically different.

Chart by author. *The market was closed on this date -- price per share based on the closest prior market close.

This is why part of investing the Motley Fool way is to deploy new money regularly. We won't be able to time the top or the bottom, but we do know that crashes happen regularly and could happen again in 2023. By regularly investing new money, you could have bought Amazon stock at the worst possible moment and still done quite well.

Therefore, rather than panicking when the next crash comes, it's best to calmly and rationally put more money to work in the stock market.

As Buffett has said, "The best chance to deploy capital is when things are going down."