What to do When the Market Crashes

A Market Crash is Coming

We all know that a crash is coming. The International Monetary Fund (IMF) just came out with a warning that the world economy could be on the verge of another recession, housing is becoming unaffordable in many cities, and wages have been stagnant. We also know that everything is cyclical, and the market can’t go up forever. So what should we do when it all hits the fan again?  What should you do when the market crashes?

When the Market Crashes

When the market crashes, there is going to be a lot of turmoil. Investments will definitely lose value, and people may lose their jobs. Companies may shut their doors for good, and the economy may move back into a recession. With all this uncertainty surrounding jobs, the economy, and the market, what should you do?

Job Loss

I get that losing your job really sucks, especially when you depend on the income. Therefore, if you lose your job when the market crashes your first priority is finding income. Hopefully, you have a decent emergency fund that will get you through for the first few months at least (If you don’t, now is the time to start saving!).

Even if you don’t have an emergency fund, there are lots of things you can do to start getting some income in: you could take a part time job, start a side hustle, sell some stuff, or even switch industries.

You could also apply for unemployment insurance to get you through the rough patch. I know that everyone hates the idea of applying for unemployment, but seriously folks, you pay into this system and that’s what it’s here for. There is no shame in getting a little help to see yourself through.

 The point is, a job loss is not the end of the world. You will get through it and you will find better opportunities. Who knows, maybe it will give you the chance to build that side hustle into a full-time gig!

What not to Do

When you lose your job, it’s super tempting to cash out of any employee sponsored retirement plan you might have held with them. Bonus money when you need it the most, right?

Wrong!

Don’t do it! I get that you might need money, but taking it out of your retirement should be the very last of all the last resorts. You’ll hurt yourself in the long run when it comes to retirement income, and you will lose out on any investment gains that result from this investment cycle.

What to do instead

 Instead, try some of the options that I mentioned above to get some money coming in, and roll over your employee sponsored plan to an individual plan (IRA). You’ll get to keep your hard-earned investments growing and you won’t have to pay any early withdrawal fees or taxes. You also won’t be stealing from your future self.

Investments

When the market crashes, your investments are going to lose value. That’s the nature of the economy. And it’s going to be rough!  You’re going to watch your investments loose 20%, 30%, maybe even 50% of their values! It’s definitely going to be hard to watch that.

What Not to Do

 Emotions are running high, and you may think that the most prudent thing to do is to pull out of the market to hold onto whatever money you have left.

Wrong!

Please check out the difference between realized and unrealized losses before you make any rash decisions on pulling out of your investments. As long as you are diversified, staying in the market is your best chance at recouping your losses and making huge gains. According to a CBS article in 2011, investors who stayed the course with their investments throughout the crash were the biggest winners.

Don’t let your emotions prevent you from winning big during the next downturn.

 

What to do Instead

Instead of pulling out of the market, you should be investing more!  I know, it seems counterproductive, but if you don’t want to listen to me, listen to the number one investor of our time, Warren Buffet:

“Be greedy when everyone else is fearful, and be fearful when everyone else is greedy”

A market downturn is the best time to be greedy. It’s basically a huge sale on stocks. The one thing I would advise is to be careful with individual stocks. You don’t want to put all of your eggs into the next Circuit City’s basket. In my opinion, its best to buy index funds, because they are automatically diversified and you have the best bet of recouping any losses with them (you can also try loss harvesting if you are super into the tax break side of things)

If you have your heart set on individual stocks, do your research. Buy strong dividend paying companies that you know aren’t going to go under. During the last recession, I bought 200 shares of BOA when the stock plummeted to ten bucks a share. It’s now trading at thirty dollars a share, and my reinvested dividends have purchases 15 more shares. I plan to hold the stock through the next bear market (and possibly buy more!) because although their business practices are sometimes shady, they do have strong fundamentals.

But I am also aware that banks took a huge hit during the last downturn, and many of them went out of business. I know that owning individual BOA stock is a much larger risk than owning index funds. Fortunately, the majority of my eggs are in Vanguards total market fund.

If you are retired/near retirement

A lot of this advice applies mostly to people with at least ten years until retirement. If you are closer, your options may be a bit different. Hopefully, if retirement is on the horizon, you have a good portion of your nest egg in safer investments, such as bonds CDS and even cash. If not, the prudent advice is still to maintain your investments. A good option would be to work for a few extra years during the downturn and keep investing.

If you can’t work (or really don’t want to, I get it!) try to rely on Social Security and or other sources of income before tapping into your investments. If you can stay invested during the worst times, your portfolio will bounce back with huge gains.

Prepare Now

Thankfully, the market hasn’t crashed yet, so you don’t really have to worry about these things. But I’m writing this because we all know that it’s coming, so we need to be prepared. We need to be thinking about what we are going to do when the market crashes, if we lose our jobs, if our investments tank. We need to be preparing now for the next market crash so it doesn’t destroy our financial security.

Have you been preparing for a crash? What will you do if you lose your job or if you lose half of your portfolio?  Lets talk about it!