What to Do When the Market Crashes

In the world of investing, market crashes are inevitable. They come unannounced, often triggered by events beyond our control—economic downturns, geopolitical tensions, or unforeseen global crises like pandemics. While the prospect of a financial market crash can be terrifying, especially for those heavily invested in stocks, it’s important to remember that market downturns are also an integral part of the economic cycle. This guide will walk you through what to do when the market crashes, helping you protect your portfolio, manage your emotions, and emerge stronger.

Understanding Market Crashes: A Historical Perspective

Market crashes are not new; they have happened multiple times in the past and will likely occur again. Historical examples include:

• The Great Depression (1929): Triggered by a stock market crash, it led to a decade of economic turmoil.
• Black Monday (1987): The Dow Jones Industrial Average dropped by 22.6% in a single day.
• The Dot-com Bubble (2000): Excessive speculation in internet-related companies led to a severe market correction.
• The Global Financial Crisis (2008): Sparked by the collapse of the housing market, it caused a global economic meltdown.
• COVID-19 Pandemic (2020): The market plummeted in March 2020, reacting to the global spread of the virus.

Each of these crashes had different causes, but they all resulted in significant short-term pain for investors. However, history also shows that markets eventually recover, often reaching new highs in the long run. Financial market crashes can be scary, can cause sleepless nights, and can impact your financial objectives, but my aim with this blog is to help you overcome this.

The Psychology of a Market Crash: Managing Your Emotions

When the market crashes, it’s natural to feel fear, anxiety, and even panic. Behavioral finance experts and psychologists emphasize the importance of understanding and managing these emotions:

1. Avoid Panic Selling:
   • According to behavioral finance expert Dr. Daniel Kahneman, panic selling is driven by loss aversion—the fear of losing money outweighs the potential for gains. However, selling in a panic often leads to locking in losses and missing out on the eventual recovery. Financial market crashes happen – they do, but the markets recover.
2. Stay Rational:
   • Psychologist Dr. John Coates, who studies the impact of market stress on traders, suggests that staying calm and rational is key. He recommends taking a step back, evaluating your portfolio objectively, and resisting the urge to make impulsive decisions.
3. Focus on Long-Term Goals:
   • Financial coach Carl Richards advises investors to revisit their long-term goals during a crash. Remembering why you invested in the first place can help you stay focused and avoid making decisions based on short-term market movements.
4. Be Lazy:
   • From Morningstar’s Samantha Lamas and Ryan O. Murphy, Ph.D – In their article, Lamas and Murphy suggest that one of the best ways to manage market volatility is to be “lazy.” This means resisting the urge to take immediate action when markets fluctuate. Often, doing nothing is the best strategy, provided your portfolio is still aligned with your long-term goals. Constant monitoring of market news can lead to impulsive decisions, so it’s wise to limit your exposure to fear-inducing headlines.

It is easier said than done, I completely get it. Which is why having a financial adviser who can take out the emotion, guide you from a professional perspective is so important.

Practical Steps to Take During a Market Crash

1. Reassess Your Portfolio:
   • Diversification: Ensure your portfolio is diversified across different asset classes (stocks, bonds, real estate, commodities). A well-diversified portfolio is more resilient during market downturns.
   • Rebalance: Consider rebalancing your portfolio by buying undervalued assets or selling overvalued ones to maintain your desired asset allocation.
2. Stay Invested:
   • History shows that those who stay invested during a crash often benefit from the subsequent recovery. According to research by Fidelity Investments, missing just a few of the market’s best days can significantly reduce long-term returns.
3. Consider Dollar-Cost Averaging:
   • Investing a fixed amount regularly, regardless of market conditions, can help you buy more shares when prices are low and fewer when prices are high. This strategy, known as dollar-cost averaging, reduces the impact of volatility.
4. Seek Professional Advice:
   • Getting through a market crash can be challenging, and this is where the value of a financial adviser becomes evident. A professional adviser can provide personalized guidance, helping you make informed decisions tailored to your specific financial situation. They can also offer an objective perspective, which is especially valuable when emotions are running high.
5. Take Advantage of Opportunities:
   • Market crashes often present buying opportunities. High-quality stocks may be available at discounted prices. Warren Buffett, one of the world’s most successful investors, famously said, “Be fearful when others are greedy, and be greedy when others are fearful.”
6. Engage in Thoughtful Action: orningstar)
   • If you feel compelled to act during a market crash, channel that energy into thoughtful actions rather than impulsive ones. Review your financial plan, ensure your portfolio is well-diversified, and verify that your emergency fund is sufficient. This proactive approach can help you feel more in control without making hasty decisions that could harm your long-term financial health.

The Role of Financial Coaching and Support

During a financial market crash having a support system can be invaluable. Financial coaches and advisers can help you stay on track:

1. Emotional Support:
   • A coach can provide reassurance and help you manage the stress associated with a market crash. They can remind you of your long-term goals and the importance of sticking to your plan.
2. Accountability:
   • Regular check-ins with a coach or adviser can keep you accountable, ensuring you don’t make impulsive decisions that could harm your financial future.
3. Education:
   • Coaches can also educate you on market dynamics, helping you understand what’s happening and why. This knowledge can reduce fear and empower you to make better decisions.

Post-Crash Recovery: Preparing for the Next Market Cycle

Once the market stabilizes, it’s important to prepare for the next phase:

1. Review Your Financial Plan:
   • Assess how your portfolio performed during the crash and make adjustments if necessary. This could involve rebalancing your asset allocation or increasing your emergency fund.
2. Learn from the Experience:
   • Reflect on how you handled the crash. Did you panic, or did you stay calm? Use this experience to improve your investment strategy and emotional resilience.
3. Build Resilience:
   • Ensure your portfolio is well-positioned for future downturns. This could involve increasing diversification, maintaining a higher cash reserve, or investing in defensive assets.
4. Stay Informed:
   • Keep up with market news and economic indicators. Understanding market trends can help you anticipate potential downturns and prepare accordingly.

Conclusion: Turning Crisis into Opportunity

Market crashes are inevitable, but they don’t have to be devastating. By staying calm, maintaining a long-term perspective, and following the practical steps outlined in this guide, you can protect your portfolio and even take advantage of the opportunities that arise during a downturn.

Remember, investing is a marathon, not a sprint. The key to success is not avoiding financial market crashes but learning how to navigate them with confidence and resilience. With the right mindset, strategies, and support, you can turn a market crisis into an opportunity for growth.

Having a financial adviser on your side, helping you through a tough time, takes the emotional decisions away and gives a professional opinion. It is very easy to panic and want out, but it is often not the right thing to do.

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If you need more advice then contact Mike Coady today to discuss our solutions and how we can help.

About Mike Coady

Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.

Mike is an award-winning money coach and industry leader in the financial sector.

Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Fellow of the Institute of Sales Management (FISM), a Fellow of the Association of Professional Sales (F.APS), a Fellow of the Institute of Directors (FIoD) and featured as a highly qualified Financial Adviser in Which Financial Adviser.

To learn how to choose a great financial adviser, download our free guide.

Blog published by Mike Coady.

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