The U.S. stock market has experienced a number of crashes over the past hundred years. During the recent Great Recession, the market plunged by an alarming 50 percent. While you do not have control over if and when the stock market crashes, you can take steps to prevent those crashes from decimating your life’s savings. The fact is that stock market crashes happen, so as the Boy Scouts say: “be prepared.”
Prepare Your Portfolio By Taking The Following Steps:
- Have some bond exposure in your portfolio since bonds tend to rise as equities fall.
- Mitigate rising inflation with REITs (Real Estate Investment Trusts).
- Don’t fall prey to home bias; protect your savings by thinking globally. Foreign equities may stay strong when U.S. equities are struggling, and foreign investments are necessary for creating a truly globally diversified portfolio.
So, when the crash happens, what should you do? The simple answer is nothing. Returns are often good after a major decline. In the two years following the Great Recession crash, the markets rebounded and actually doubled in value. Selling your stocks when the market crashes and their value has plummeted is the worst thing you can do, because it locks in your losses. Unfortunately, many investors panic and cash out in an effort to salvage some funds rather than waiting it out. Doing nothing makes us feel powerless, so our brains tell us to do something.
Selling stocks during a crash guarantees that you will lose money. You sell your investments for less than you paid for them, and most likely less than they are worth. In fact, investment guru Warren Buffett believes that market lows are a great time to buy because you can get stocks at bargain prices. The trick, and the challenge, is to be patient and play the long game. History tells us that the value of stocks will go up again, so the best approach to coming out on top is to wait. If you cash out following a big dip, you may well miss the inevitable rebound that usually happens soon after.
Tune Out The Constant Financial News Updates
Technology often adds fuel to the fire. Today, we have constant access to fear-mongering speculation with 24/7 news, tweets, and stock updates. We can also watch changes in our portfolios in real-time, regardless of where we are (our couch, a restaurant, on vacation), and take action with just a few clicks. This barrage of financial information clouds the bigger picture and encourages hasty decision-making. It can take mountains of self-control to avoid hitting “sell.”
You can bolster your fortitude by steering clear of (or at least moderating your consumption of) financial news and sublimating your impulse to compulsively check your portfolio. This may seem counterintuitive, but it will help you to make big picture decisions, rather than reacting to what is happening in the moment. Your investment goal should be to optimize returns over decades, in which case one crash will have little to no effect. To achieve this goal, worry less about normal fluctuations and focus more on smart investing practices, such as building a portfolio of diverse and low-fee investments. Long-term growth means tolerating occasional declines.When the next (inevitable) stock market crash hits, don’t despair or tear your hair out. Kick back, relax, and trust that your well-diversified portfolio will recover.