15 Things To Do When the Market Crashes Again

To say it’s been a volatile year for the financial markets is a categorical understatement. Even though stocks plunged to all-time lows earlier this year, market indexes have regained their losses from March. At the time of this writing, the S&P 500 and Nasdaq Composite have realized year-to-date gains of approximately 5% and 23%, respectively, while the Dow Jones Industrial Average is down by about 2% from the beginning of the year but up 52% from its March low.

A number of analysts and investors are worried that the market’s recovery from its bear market lows will be short-lived and that another recession is looming on the near-term horizon. One thing’s for certain. There’s no way to predict the future.

But, with history as our teacher, we know that, whether months or years down the line, another market crash will occur. These are 15 things you’ll want to do when that happens.

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One of the absolute worst things you can do in a market downturn is to panic. Logging feverishly into your brokerage account every hour to watch with dismay as your portfolio plummets probably won’t help either. The best thing to do is sit tight and wait it out. In the words of Warren Buffett, “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.”

ALSO READ: Stock Market Crash 2.0: Here Are 3 Stocks You'll Absolutely, Positively Want to Buy

Tempting as it may be to hit the sell button if your holdings are losing value due to a market downturn, focus instead on buying recession-proof companies that you believe in if you have cash to invest. Certain sectors tend to perform better than others during market downturns, with healthcare stocks, tech stocks, electric utility stocks, and certain consumer staple stocks leading the winners in the current 2020 market.

A market crash can also be an excellent time to buy companies that you’re committed to holding for the long haul at a discounted price. To borrow another choice remark from Warren Buffett, “Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.”

It’s important to work on diversifying your portfolio in any market climate. Concentrating your portfolio too heavily on any one sector can be a serious mistake, not to mention potentially detrimental to the long-term resilience and profitability of your portfolio if the market crashes again.

Investor and entrepreneur Jim Rogers once said, “Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows.” A long-term investment strategy is the best strategy in any market situation. This investing mindset will also serve you particularly well in a market crash.

Thinking in the context of the long-term scenario when the market is in a tailspin can help you to take the emotion out of the picture, look at your portfolio with greater objectivity, and assess what (if any) companies are wise additions to your basket of stocks based on your personal strategy and aversion to risk.

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One of the realities and, admittedly, challenges of investing with a long-term strategy is that you will inevitably need to ride out some significant highs and lows along your investing journey. But you shouldn’t buy shares of a company you don’t believe in just because it’s trading at a discount. Likewise, it’s also important to remain discriminatory in your investing choices when stocks are becoming increasingly overvalued (as they are at this moment in time).

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It’s only natural to experience some type of visceral reaction if you see the companies that you’ve invested your hard-earned cash in lose a quarter, half, or more of their value in a matter of days. You can take some of the emotion out of investing in anticipation of another market crash by training your focus on the diversification of your portfolio, sharpening your own investment strategy, and building your cash reserves.

Fear is one of the most common emotions investors feel during a market crash, and again, it’s often a natural reaction. But joining the predictable sell-off that occurs when the market falls is one of the worst things you can do.

When evaluating the long-term strength of your current investments and potential buys in a recession-filled environment, another gem from the Oracle of Omaha can serve as a helpful measuring stick: “Buy a stock the way you would buy a house. Understand and like it such that you'd be content to own it in the absence of any market.”

ALSO READ: 4 Reasons I Don't Worry When My Investment Account Balance Goes Down

While selling stocks in a market crash is rarely a good move, there are a few situations where this may be a plausible course of action. To draw upon Buffett's philosophy, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

For instance, if you’re short on cash and disposing of a particular stock will help remedy the issue, this can be a well-grounded motivation to sell. In such a situation, it bears considering whether the absence of these shares will fundamentally impact your portfolio in the long term and if it’s worth selling if you will be doing so at a substantial loss.

In any type of stock market, and particularly in a bear market, stocks that are exhibiting high growth beyond the average growth of other competitive players in the same sector can be solid long-term plays to add to your portfolio. Growth stocks can significantly propel you along your wealth-building journey but often come at a steep price. One of the upsides of market downturns is that you may be able to buy these premium stocks at a lower price than normal.

As unnerving as a market crash can be, the good news is that it will ultimately rebound. Most crashes and corrections in the stock market end within several months, although the trajectory of full economic recovery can stretch far beyond that.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

One method of diversifying your basket of stocks is to invest in exchange-traded funds (ETFs). Rather than investing in one particular stock, when you purchase this type of investment, your accessible assets include all the stocks in that fund. A number of ETFs follow the performance of particular stock market indexes, such as the S&P 500. You can also invest in ETFs across just about every imaginable industry including healthcare, information technology, finance and banking, real estate investment trusts (REITs), and more.

ALSO READ: 3 Tips for Building a Diversified Investment Portfolio

If you’ve been eyeing shares of a particular company with compelling buy signals but have thus far held off because you felt they were too overpriced, a market crash can be a good time to scoop up such a stock at a discount -- if other signals for its long-term profitability and growth are present.

Dividends can be an investor’s best friend. While some companies have slashed dividends in 2020 due to economic uncertainty, there are plenty of others with solid cash reserves and underlying growth that maintain stalwart yields. These three companies could double their dividends in the next few years.

In most scenarios, if you’re not comfortable investing during a downturn or are not in a position to do so, the best thing to do is to delay any action until the market furor subsides.

ALSO READ: Have Money You're Waiting to Invest? Buy These 2 Stocks When the Market Pulls Back

The decision to invest in a market crash also comes down to you and your portfolio’s particular resilience to risk. Some investors are more comfortable buying up shares of a high-risk company in a market downturn on the hope of future profits, while others prefer a more conservative approach. Regardless of your personal credo, portfolio diversification and a forward-thinking philosophy are two of the most valuable ways to manage the risks of investing in all economic conditions.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It would be foolhardy to say that the 2020 stock market is out of the woods. Although hope is on the horizon that a successful COVID-19 vaccine could be available in limited doses before the end of the year, with additional vaccines and therapeutics gaining approval in the earlier part of next year, we’re still in a waiting game.

The good news is you don’t need a crystal ball to make smart investing choices. Whenever the next market crash does come, by letting logic win over the temptation to invest emotionally or do a mass clean out of your portfolio, and only buying stocks you’re willing to hold five to 10 years at minimum, you can successfully steer through the storm.

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