As a financial advisor since 1993, I’ve gone through the Bond Market crash of 1994, the Tech bubble crash of 2001-2002 and the Financial crisis of 2008-early 2009 all the while holding my clients’ hands throughout these crashes.
Here are five things you can do during a stock market crash
1) Keep your emotions in check
It It’s very easy to let your emotions run wild when you hear that the Dow has just dropped 3000 points. You might be inclined to panic, but in these times, a clear head prevails. There is no crystal ball to tell us where the market is going to hit bottom and trying to time the market is a “fool’s game. Panicking will only lead to quick decisions that may turn into regret later. Sure, you want to ease the pain but the decision to sell at the bottom, or near bottom, could likely lead to a lot more pain down the road.
Remember that time you got an email or text that really made you mad and your first instinct was to fire off a mean-spirited reply? We all know that you should calm down and take an hour or two to clear your head before replying. It’s the same with making decisions when the stock market is crashing. Take some time to clear your head before placing trades you might very well regret in a month.
Listen, the stock market has never fallen and not recovered. Be patient and take your emotions out of the decision-making process. Your money will thank you later.
2) Emergency Fund
I’ve always said that your emergency fund is the most important financial account you can have. Normally it is money set aside for the unexpected hot water tank failure or a car repair that came out of nowhere. However, it’s also there for times like this when your ability to make money might be interrupted.
It can also give you the ability to go on the offense when the market has come crashing down. Throughout my years as an advisor, I’ve seen some folks have a smaller emergency fund ($5k-$10k) and then I’ve seen others who felt more comfortable with a much larger cushion ($50k-$100k+). For those will a larger cash position, now is the time to consider doing some homework and potentially using a small portion to jump on some beaten down, quality companies when the opportunity presents itself.
3) Re-evaluate your Goals
If you are 20 years away from retirement, then your goals probably won’t change. You have time to ride the market back up and recover. Now, if you are within two years of retirement, then perhaps your goals might have shifted. Hopefully three years ago (5 years to retirement) you have already shifted your risk level in preparation to retire, but if not, now is the time to understand the risks and rewards of investing. Keep in mind, there are two stages of investing, the accumulation stage and the distribution stage. While you are working and saving, you’re in the accumulation stage. As you approach retirement, you’ll enter the distribution stage. The investments that get you to retirement (growth) might not be the investments to get you through retirement. Are growth funds still working for you? Do your investment holdings still match your goals?
4) Re-evaluate your Investment holdings
Perhaps you’ve only invested in mutual funds over time, now might be the chance to buy some of those individual stocks you like. Take a chance and step out of your investing comfort zone.
5) Do you make any changes?
During a stock market crash it’s hard to time the bottom so don’t even try. What you want to do is go on the offensive versus being defensive. Look for opportunities that might bring your account back faster. It’s time to think outside of the box and do a diagnostic of your accounts. Are your funds positioned to recover quickly? Are you paying too much in fees? Are you taking too much risk? It may also be time to add to your accounts or positions. Again, I can’t stress enough that timing the market just isn’t a known science. But, if you have some free cash around, it may be a good time to buy while things are reduced in price.
The way I stay positive is that things are on sale, and who doesn’t like a good buy.
You very well might be comfortable with what you currently own and choose to ride the market back up with your current holdings and that’s fair. However, now might be the best time to give your portfolio a tune-up.
If you’re not sure what risks you are currently taking, should be taking, or how you should be positioned to meet your goals, talk to a professional that can help you navigate the ins and outs of investing. After a downturn is not the time to be shooting from the hip. Find someone to help you. In the long run, it will be worth it.
Play it cool, make sure your goals and investment holdings still work for you and if not, make the necessary changes.
It’s time to play offense and not defense.
Live free my friends,
Eric Gaddy
