The question is not if the stock market crashes but when. It will be an inevitable truth at some point in your investment journey. And it will be entirely on you how you navigate such an experience.
In this post, I will discuss 9 things you should do to prepare for a stock market crash. By taking the time and following these tips, you can come out stronger on the other side.
“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”
― Morgan Housel, The Psychology of Money
Stock Market crashes on Wall Street have a way of making you really feel bad about your money. And let me tell you, it feels much worse to lose a lot of money during a crash than it feels good during the good times. There is nothing that can really prepare you for the rollercoaster of a stock market crash.
Hopefully, you will remember posts like this one when the next crash comes around. They can be a vital reminder of your financial goals and investment strategy.
#1 Focus On The Long-Term And Just Do Nothing
If you are like me, you focus on long-term investing and invest in good companies. With a time horizon like that, you invest over a much longer time than any crash has lasted in the stock market’s history.
Just put all the panic aside and stick to your plan. For a long-term investor, this will, most of the time anyway, mean doing nothing at all. This is the beauty of long-term investment. It is simple in it’s approach, yet extremely effective done the right way.
#2 Have An Investment Thesis And Know Why You Own Your Stocks
Knowing your investment thesis is a good idea for stock investments. It is the foundation of your investments. When you doubt one of your investments, you can look at the company and validate your investment thesis.
Bear markets are, most of the time, sector or market-wide events. No company-specific news was causing the sudden drop in the price of your stocks. As a result, you will find your investment thesis still holds water.
#3 Always Diversify Your Portfolio
One of the most effective ways to insulate your portfolio from dramatic movements during a stock market crash is diversification. It simply means not putting all your eggs into one basket.
This is important if you are an investor in individual stocks. I recommend investing in at least 25 different companies for stock investors. You can also put a portion of your portfolio into index funds, mutual funds, or exchange-traded funds. They can help you get that diversification very easily.
Other investment options to diversify your asset allocation of your investment portfolio are real estate investments, cryptocurrencies, etc.
At the end of the day, diversification is directly connected to your risk appetite. If you can sleep at night with a less diversified portfolio, that’s fine, too. But then you anyway have a much higher risk tolerance than most of us.
#4 Buy The Dip Of The Stock Market Crash
You know that no crash will last forever, right? Doesn’t it make sense to reinforce your investments by buying this dip? Such a low price will not last forever and presents a perfect opportunity.
It’s especially true if you absolutely believe in your company stocks. On the way down, you can use dollar-cost averaging by investing small portions over time.
Warren Buffett taught us “[…] to be fearful when others are greedy and to be greedy only when others are fearful.” If there is ever a time to be greedy, it is when a market crash sends the entire market on a downturn.
#5 Change Your Mindset To See The Opportunities Instead
Investing in the stock market has a lot to do with psychology. We humans are, by default, very bad long-term investors. Doing nothing or doing the opposite of what our instincts tell us is incredibly hard! If you have never experienced a huge bear market in your investment journey, you tend to underestimate these forces. But believe me, it’s hard!
Luckily we are able to change our mindset with time. I firmly believe that every market cycle offers different types of opportunities. You just have to look for them. As for market crashes, they present an opportunity to get into the market at a lower price.
One of the best images I always come back to is this one:
In this image, you see the biggest market crashes and declines, like the Black Monday, dot-com bubble, etc., from 1928 to 2023. It is a very powerful image that shows you how insignificant these declines are after some time. At the time they probably all felt very bad, no doubt about that. But in the big picture, they seem much less scary.
Sure, some events like the great depression can last for a long time. But these kind of catastrophic events do not happen often.
Now that I look at it, these crashes absolutely provided some excellent buying opportunities.
#6 Distract Yourself From Negative Forces
Sometimes it is best to just eliminate the negative news surrounding the stock market during a bear market.
All too often we are surrounded by headlines that are solely designed to instill fear. They want you to jump to action and make changes in your portfolio. Your best bet is to turn them off.
How about spending more time with your loved ones, going for a hike, or just relax? All of these things will get you distracted and can protect you from making investment decisions you might regret.
#7 Reinforce Your Broader Financial Plan
You spend a lot of time to develop your financial strategy to chase your financial goals. You surely don’t want to let the ripple effects of a single stock market crash get in the way of that?
Remember what your goals are and concentrate on the long-term of your plan. Economic growth will eventually come back, and so will significant gains.
#8 Have A Financial Safety Net
One of the best ways to shield yourself from the turbulence in the financial markets is by having an emergency fund. The money you invest should never be money you will need in the short-term.
To make sure market downturns are not turning you down with them, always have enough emergency savings. These savings should not be invested in the stock market. Put them in a high yield savings account or a similarly risk-free financial account.
Now with savings account providing up to 5% of interest, you can even protect your savings from inflation! One of the nicer side effects of high interest rates.
Keep in mind that these times might not last forever. But as long as they last, it is one of the best things you can do. Savings accounts are virtually risk-free!
#9 Ask A Financial Advisor During A Stock Market Crash
When you are in need of a second opinion for your investments, you can always ask a financial advisor to take a look at them. You don’t need to let them manage your assets. Financial advisors can help you make better investment decisions at times when you are struggling to make sense of the market.
Finding a good financial advisor is not easy. I recommend the Garrett Planning Network, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network. These networks can get you in contact with a fee-only advisor. No matter how much money we are talking about, it will not change your costs.
Final Thoughts – 9 Things To Do To Prepare For A Stock Market Crash
If you came here because we are living through a stock market crash at the moment: I hope by reading my takes from how to handle a stock market crash you feel a little bit better about your investments.
It never feels great dealing with a down market. But with some tweaks and by changing our perspective, we can turn a perceived negative event into a positive one. I think this is one of the most effective ways to deal with a stock market crash.
And no worries, the next bull market will absolutely come!
Disclaimer: The information in this blog post should not be considered investment advice or a replacement thereof. They are solely provided for informational purposes. Please consult with a financial advisor for any specific questions on your financial situation. Remember that past performance is not a good indicator for future returns. Also, none of the mentioned stocks are to be understood as recommendations. Don’t buy yourself something solely based on what you read here.
