To be honest, this memo would be even better if it had a title like, “Top 5 Tips to Completely Avoid the Next Market Crash.”
It only makes sense, quite frankly, to take a detour around the next market decline rather than driving straight through it and picking up the pieces afterwards. Right? If only investing was that easy.
The truth is, no one – truly, no one – knows exactly when the next market decline will be or how low it will go when it does drop. It could be next week, next month, or years down the road. And the losses could amount to 5%, 15%, or 50%. Despite our hunches and intuitions – we all have them – there is simply no way of knowing. One thing is certain: At some point, the market will fall.
The best we can do is be prepared for when that time comes. We need a plan of action so that a process, not emotion, guides our decisions. So here are five practical steps you can take during the next market downturn.
1. Breathe Deeply and Relax
This is not the time to sell. Remain calm and remember you are a long-term investor. This money is being saved for retirement. You don’t need it today. When you sell during a market crash you are locking in your losses, and that’s the last thing you want to do.
2. Take a Vacation [from checking your account]
When the market is rising, it’s fun to log in and see how much your net worth has increased each day or week. But when the market is dropping, that same activity can make you sick to your stomach. It can also cause you to make bad decisions. If watching your account balance sink lower makes you nervous or fearful, just don’t check it. Your blood pressure will thank you.
3. Avoid Negative News
The mass media is not one to let a good crisis go to waste. They know fear draws in readers and viewers, which is how they make money. Naturally, their headlines and news leads prey on our emotions. As investors, we should do everything in our power to ignore negative news. Take a walk, call a friend, spend time with family – fill your time with happiness, not gloomy news.
4. Consider Buying More
When the market drops, investments have been marked down. It’s a sale! Who doesn’t like a good bargain? When your favorite retailer offers a store-wide sale are you disappointed? The same should hold true if you are a long-term investor. When the market falls, you get to buy more of a good thing at a cheaper price. Consider increasing your retirement contributions.
5. Contact Your Advisor
Sometimes the best way to control your emotions in a market crash is to talk it out with someone. Meeting with an advisor during a market drop is a great time to ensure you are still on target to retire comfortably. Your advisor can help you stay the course on your path to retirement.
These actions will not only help you survive a market decline, but even more, profit from the fear of others. Keep in mind, as renowned investor Benjamin Graham once said, “In the old legend, the wise men boiled down the history of mortal affairs into a single phrase: This too shall pass.”