Given the recent drops in the stock market, you might be feeling bad and angry at your investments. You might be experiencing a range of emotions and confused over what to do next.
Well, I’m here to help you through this stock market crash … and the next one … and even the one after that.
Many of us have seen a lot of our net worth erode when the market corrects itself (funny, because nothing feels correct about losing money). It’s shocking. After seeing consistent gains and feeling like a winner, you suddenly got a dose of market volatility and it can be humbling.
Luckily, there is a playbook for these scenarios. Follow these steps and you will emerge on the other side of this stock market crash looking great and still on track in your journey to wealth.
Step 1: Stay Calm
Emotions are your enemy right now. Emotions are the biggest reason casual investors underperform.
As we go through any market correction, I find myself having the same conversation every time:
Friend: “Man, WTF. The stock market is crashing! What do I do?!?!”
Me: “Calm Down.”
Friend: “F!&# You!”
Me: “Ok. We’ve talked about this. You don’t need to do anything. Ride it out.”
Friend: “What are you talking about?!?! I have to save my money. I’m going to sell!”
Me: “No. Give it a chance. Aren’t you still up? If you sell now, you’ll lock in your losses.”
Friend: “I hear you, but …”
Me: “We’re in the long game for wealth. Breathe.”
The gut reaction when we see stocks dropping is to sell. Sell everything. Save what you can. Get out and run. All you can think about is how much money you could lose and why the stock market is really a hustle (it’s not).
Selling when your stocks are low is a great way to guarantee you lose money. You haven’t realized a gain or loss until it’s sold, so instead of selling your stocks when they are low, sell them when they are high. You bought that company, ETF or robo-advisor account because it made sense for a long-term investment. Don’t doubt yourself now.
Staying the course can be hard when you see your net worth falling. Keeping your emotions in check and remaining calm is important to ensuring long-term wealth creation.
One way to stay calm is to stop checking your brokerage accounts. Delete the app. Block the website. Whatever you need to do to stop obsessing over the minute by minute value of your investments, just don’t look at your brokerage accounts. That includes retirement accounts too.
As much as you can, stay away from any financial news. We, as humans, love to freak out and panic during a stock market crash. The financial news feeds on this fear and sometimes forgets to mention the “don’t panic” part. The news will stir emotions that will hurt you, not help you.
You may scoff at the importance of controlling your emotions. Trust and believe that many people have ruined themselves by taking actions based off of emotions and feelings instead of sound financial strategies. Don’t become one.
Step 2: Keep Investing
Market downturns are the best time to invest!!!
Yes … you should be putting more money into the market. Now that you are staying calm, let’s talk through this logically.
The most common way to make money in the stock market is buying shares at a low price and selling them later at a higher price, a.k.a. “buy low, sell high.” It’s important to understand that price isn’t just the stock price, but the underlying value of the stock. You want to buy things when they are undervalued and sell them when they are overvalued.
When the stock market crashes, stocks drop in value, fast and hard. Many of them suddenly become undervalued compared to what they are actually worth, their intrinsic value. This means they become cheap and present good investment opportunities.
So why wouldn’t you buy stocks when they are cheap and on sale?
There have been a lot of stock market crashes and bear markets in history which we can use to start to understand market downturns. If we define a bear market or stock market crash as a drop of 20% or more from a recent peak, and we look at the S&P 500, we see there have been 16 bear markets since 1926 according to TheBalance. Our most recent one was caused by the Coronavirus pandemic in 2020.
Historically, bear markets are followed by bull markets, where we see a gain of 20% or more. And, over the long-term, the stock market is up. If you invested $1,000 in the S&P 500 on January 1st, 1990, and did nothing but leave it there until March 31st of 2020 your investment would be worth over $7,500. This includes the dot-com bust of the late 1990s, the housing crisis around 2007 and the Coronavirus drop of 2020.
As investors say, the stock market produces positive returns in the long-run. And if you believe this, then investing when things are priced low is a good investment.
You don’t need to obsess over finding the right stock. A good market ETF, like VTI, or a high-quality robo-advisor, like M1 Finance, will allow you to quickly and easily buy during the downturn. Investing here will allow you to participate in the eventual return to sanity. Focus on building a healthy and diversified portfolio.
Last, if you are investing monthly through a 401k or IRA … keep it going. Now would be a great time to increase your monthly contributions or to get started. Remember, it’s a sale!
If you’re looking to get started investing now, there are several brokerage firms offering free trades and $0 in commissions.
Step 3: Ride it Out
Now you are calm and not letting your emotions determine your actions. You’ve committed to keep investing and picking up investment bargains. You’re on track to surviving this stock market crash.
Now you need to just ride it out.
Bear markets, market corrections and stock market crashes don’t last forever. Don’t be fooled, they can last for years, but if you stick to your principles you will continue along your journey to wealth.
If you are in retirement or about to retire, talk with a professional about ensuring you have a defensive and risk-averse portfolio. If you are relying on money to live off of soon, keeping it 100% in stocks is risky and can see money you need evaporate with bad news.
Step 4: Go Searching for Opportunities
If active trading is a part of your long-term wealth strategy, then now is a good time to go hunting for opportunities. Now is when the irrationality of the markets can create great long-term opportunities. Many companies with great fundamentals, strong dividends or great businesses will become undervalued as all the irrational investors sell.
Take some time to understand Value investing as a strategy for investing in the stock market. Value investing hinges on finding companies that are undervalued in the market using a variety of public information. It looks to understand the true value of a company based on business fundamentals and exploit where the public value is off. Since investors often overreact to news, over time the public value should rise to meet the true value. This methodology provides a framework for choosing companies to invest in.
During a market correction, the sudden drop in the value of so many companies results in many buying opportunities. Those who take the time to research and make smart investments can benefit greatly from the remains of a stock market crash.
It’s Going to Be OK
Stock market crashes always feel worse than they really are. Building wealth is a long-term game and a temporary setback isn’t enough to derail the journey.
More importantly, instead of being afraid of a market drop, recognize the opportunity in front of you. Understanding the irrational nature of the market brings opportunities for someone looking to build long-term wealth.
Need a place to vent and talk about this market drop? Leave a comment below and let’s talk.
Damien is a Personal Finance Nerd and former Facebook Product Manager who started Wealth Noir to help others find wealth. He actively invests in stocks, robo advisors, and cryptocurrency … but loves real estate investing. He holds an MBA from MIT and a Comp Sci & Econ degrees from Unv. of MD. He’s a proud dad, which is his biggest accomplishment.
D Greenburg says
This article does a tremendous disservice to readers. Telling investors “Now is the best time to invest!!! Yes … you should be putting more money into the market” is a terrible mistake because you have no idea what any given individual’s risk profile is, what their financial goals are, what real rate of return they need in order to maintain their standard of living, or anything else. Telling people not to obsess over what stock to buy and to just buy an ETF is incredibly foolish and misleading. That doesn’t offer any help with regards to the risks associated with buying an ETF. You really could use some serious fact-checking on your own website!
Damien Peters says
Sorry you disagree, but this is based on research from other financial experts, data and simulations based on many many stock market crashes, and personal experience. We even link to several other publication with the same beliefs as us and can give you some more links if you’re interested.
People should talk to a registered advisor to get custom recommendations based on their current situation, risk profile, and other factors. But, this educational material is well aligned with good practices.
Did you have alternative advice that you think is better?
D Greenburg says
Stocks are not “cheap”. By virtually every metric they are significantly overvalued. The market is the most expensive in history other than in 1929. You don’t make any mention of talking to a registered advisor in the body of the article you just say “Buy now!” without any context. Then you talk about active trading which infers buying and selling on a regular basis without regard to risk, nor is that conducive to a long term strategy. Your content is vague. NOW is NOT the “best time to invest”. There is no “best time” and claiming such a thing is utterly misleading.
Damien Peters says
Hey D Greenburg,
I’ll start by saying Now is the best time to invest, because it’s always the best time to invest. Sitting on the sideline and “waiting” for the market to be right is a great way to avoid building wealth.
You don’t need a registered advisor in order to invest in broad general funds.
This article is aimed for anyone, during any crash or correction. Stocks, during a crash or correction, are always going to be cheaper than the preceding bull market. That’s a fact, and well understood and discussed in good financial literature.
I’d love to hear about what you recommend, read about your strategies, or even get some links to some documented and trusted counterpoints. I understand you have a different opinion, that you need an advisor, that you don’t think now is the time to invest, but we disagree and are confident in the research behind our material. Also would love to hear more about who you actually are.
Marissa martinez says
Hello damien, can you teach me about investing in stocks?