A stock market crash isn’t the end of the world. Here’s how to weather it and stay the course.
The S&P 500 recently recorded its worst first-half performance since 1970. Year to date through July 19, the S&P 500 has drawn down nearly 18%, edging into bear market territory multiple times. Poorer-than-expected earnings calls from large-cap stocks such as Meta Platforms Inc. (ticker: META), Netflix Inc. (NFLX), Walmart Inc. (WMT) and Target Corp. (TGT) dragged the index down in previous months. Recently, disappointing results from financial sector titans like JP Morgan Chase & Co. (JPM) and BlackRock Inc. (BLK) further rattled the index. With the consumer price index showing inflation spiking 9.1% year over year in June, all eyes are now on the Federal Reserve as the markets anticipate more routine rate hikes through the rest of 2022. With all this going on, investors are understandably nervous about the potential for a bad stock market crash. Here are seven tips to help you stay calm in case the worst happens.
Be fearful when others are greedy, and greedy when others are fearful.
This quote comes from the “Oracle of Omaha” himself, Warren Buffett. As the long-time chairman and CEO of Berkshire Hathaway Inc. (BRK.B, BRK.A), Buffett made his fortune as one of the greatest value investors in history. His adage is simple and holds true: When the crowd is panic-selling and fear is running high, investors can find great buying opportunities when stocks go on a fire sale. Buffett still goes on buying sprees himself using Berkshire’s ample war chest of cash when markets experience a downturn. Great choices here include blue-chip, dividend paying large-cap U.S. stocks with strong balance sheets and good cash flow. Other great choices include low-cost exchange-traded funds, or ETFs, that track a well-known stock market benchmark, such as the S&P 500 or Dow Jones Industrial Average.
Don’t look for the needle in the haystack — just buy the haystack.
This quote comes from the late John “Jack” Bogle, founder and former chairman of the Vanguard Group. As the inventor of the index fund, Bogle was strongly in favor of a low-cost, passive approach to investing. Bogle disliked stock picking, noting that most retail and professional advisors couldn’t beat the market consistently over time. He also noted that during crashes, the risk of single stocks taking a severe beating, getting delisted or even declaring bankruptcy were significantly higher. Bogle advocated for a diversified portfolio of hundreds, if not thousands of stocks, from all market capitalizations, sectors and geographies. Investors who subscribe to this approach can significantly lower their drawdowns and volatility during a crash.
Don’t time the market, always stay the course.
A common mistake investors make during a crash is panic-selling at a loss and holding what remains of their portfolio in cash to “buy back in when the market hits a bottom.” The painful reality is that timing the actual bottom is very difficult. Market crashes and bear markets can be drawn out, highly unpredictable, and are capable of numerous false rallies, also known as “bull traps.” Often, investors who try to time the market end up missing the rebound, which can severely hinder their future returns. Instead, investors should commit to staying the course by holding positions they believe in and contributing more capital if they have it via dollar-cost averaging.
Don’t borrow money to invest.
“Buying the dip” during a market crash could lead to outsized returns later down the line, but it comes with a caveat: Don’t use money that you can’t afford to lose. Examples of this include using your emergency fund, a home equity line of credit, or HELOC, student loan or even credit cards to buy stocks during a market crash. This is highly risky because as mentioned earlier, timing the bottom is incredibly difficult. There is always a chance that after you buy in (with borrowed money), the market takes another tumble, and now you have to make loan payments without any cash to service that debt. Leverage can be a great tool to increase returns, but using it during a bear market is excessively risky.
Don’t neglect the role of alternative investments.
A common mistake made by many investors during bull markets is an oversized allocation to equities. It’s not uncommon to see investors with 100% in stocks. This approach is highly risky and inefficient. Adding non-correlated assets such as bonds (especially Treasurys), gold, commodities or real estate can lower risk without impacting returns too much. During a crash, some of these assets can soar in value, allowing investors to sell them at a profit. Investors can then use these proceeds to rebalance into their pummeled equity positions, thereby buying them at a low price. A crash is a good way to test whether or not your risk tolerance is sound. If not, consider adding more bonds, cash or alternative investments to your asset allocation.
Consider tax-loss harvesting.
Investors holding paper losses in a taxable account can consider selling those investment to claim a tax credit for offsetting future capital gains. To avoid the IRS’s 30-day wash sale rule, investors can immediately purchase another stock or ETF that is not “substantially identical” to the one they sold, which allows them to remain invested for any rebounds. A great way to do this is via buying and selling ETFs that are closely correlated and hold similar stocks but track different indexes. A common example is swapping the Vanguard Total Stock Market Index ETF (VTI) for the Vanguard S&P 500 ETF (VOO). An example using stocks might be selling Advanced Micro Devices Inc. (AMD) for Nvidia Corp. (NVDA). Strategically locking in investment losses in a given tax year is known as tax-loss harvesting.
Tune out social media.
The colorful finance and investment personalities on TikTok, YouTube and Reddit can be quite doom-and-gloom sometimes. Remember that these individuals often sensationalize news and are presenting an opinion, not fact. It’s easy to get caught up in an echo chamber when the markets are melting down and emotions are running high. If you find yourself panic-scrolling and engrossed in your social media feed, consider deleting the apps and taking a breather. A conscious step away from the flashing headlines can help you think clearly and objectively about your investment portfolio. Making independent, rational decisions based on unbiased evidence is key to surviving a market crash.
7 tips to stay calm during a stock market crash:
1. Be fearful when others are greedy, and greedy when others are fearful.
2. Don’t look for the needle in the haystack — just buy the haystack.
3. Don’t time the market, always stay the course.
4. Don’t borrow money to invest.
5. Don’t neglect the role of alternative investments.
6. Consider tax-loss harvesting.
7. Tune out social media.
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7 Tips to Stay Calm During a Stock Market Crash originally appeared on usnews.com
Update 07/20/22: This story was published at an earlier date and has been updated with new information.
