Markets can’t go up forever. There’s a constant ebb and flow to economies; sometimes they’re up, and sometimes down.
On occasion, they crash, causing massive societal disruptions.
Talking heads constantly discuss recession risks, but nobody can predict them. Unfortunately, it’s not a question of if but rather when. Sometimes, it happens when we least expect it.
Because of the unknown nature of market crashes, it’s best to plan ahead and determine what to do when the market crashes well before it happens.
Here’s what you need to do when the market crashes.
Are We Heading Towards a Market Crash?
Unfortunately, there’s no way to predict when the market will crash. Economists forecast a 50/50 chance of Recession in the next 12 months, but they’ve been crying wolf for over a year, and we’ve seen primarily consistent growth.
However, the real people tell a different story.
The Status of Everyday Americans
Rising inflation in essentials like housing and healthcare have millions of American families teetering near insolvency.
Over 70% of Americans live paycheck to paycheck, and 67% can’t afford a $400 emergency.
As student loan debt comes due, Americans must tighten their belts even more.
What’s uncertain is how long Americans can hold out and whether it will all come tumbling down simultaneously. If it does, a market crash is all but certain.
What To Do When the Market Crashes
Market crashes wreak havoc on society in numerous ways. During the turmoil, investments will plummet in value, millions of people will lose their jobs, and many businesses will shutter their doors for good.
Here are the best ways to navigate the most common consequences of a market crash.
During a stock market crash, job losses create the most significant impact on regular people. Most Americans can not afford to miss a single paycheck, much less lose their job.
When the market crashes, and you lose your job, your top priority must be income. The best ways to get income during a market crash include filing for unemployment, getting a part-time job, joining the gig economy, starting a side hustle, and selling stuff.
At this stage, unemployment is your best friend. There’s still a stigma against filing, but remember, you pay into this system with every paycheck. Unemployment insurance exists to help in these circumstances, so don’t fret about filing.
In a nationwide financial calamity, many people are likely filing, which may cause disruptions or delays in your service. Don’t let that hold you back. Be persistent to get the assistance you deserve to help you through these trying times.
If you’re used to full-time work with competitive pay, taking a menial part-time job seems beneath you.
However, if you need money, sometimes you have to take what you can get. There’s no shame in working retail a few hours a week to bridge the gap between income and expenses.
Part-time work is ideal because it keeps money coming in and allows you to search for a higher-paying job in your industry. It also prevents resume gaps, which can threaten your ability to find new employment.
Starting a Side Hustle
We think of side hustles as things we do in addition to our full-time jobs, but many people parlay their side work into full-time positions.
Use your skills to start your own business. Offer consulting, sign up to work freelance, or create something you can sell. People thrive in blogging, making videos, creating courses, and selling their creations on Etsy.
You may find that a recession job loss was the best thing that ever happened to you, as it allowed you to pursue your passions for a living.
The Gig Economy
The quickest way to get some money coming in is via the gig economy.
Sign up for Uber, Lyft, and Doordash to deliver people and food in your spare time. Walk dogs, deliver groceries, and help people with various tasks around the house.
One pitfall to the gig economy during a market crash is that everyone will flock to these jobs, reducing the demand and thus making it harder to earn an income. However, every little bit helps in desperate times, so it’s an excellent option to try when the stock market crashes.
Most of us have random things lying around we can sell. Use Facebook Marketplace or eBay to display your wares, and use the income to pay for living expenses.
Be careful with eBay, though – ensure you sell the items at high enough of pricepoints to make it profitable and don’t forget the shipping charges. It may cost more than you make if you don’t account for all the variables.
Don’t Cash Out Retirement Accounts
If you had an employer-sponsored retirement account such as a 401K, you might be tempted to cash out to bridge the income gap during a recession.
That massive pot of money constantly losing value during the recession seems ripe for the picking. It’s the best of both worlds: you get the cash you need to survive, and cashing out limits losses.
It’s the best option, right?
Don’t do it!
Taking money out of your retirement should be the very last of all the last resorts. Withdrawing now will absolutely destroy your financial security in retirement. You’ll lose out on any investment gains that come with the next bull market, which is all but guaranteed unless the entire country collapses (in which case, we’ll have much deeper problems).
Cashing out your 401K also costs far more than you think. You’ll have to pay taxes and early withdrawal penalties, both of which will reduce the total take-home sum.
What To Do Instead
Withdrawing from a 401K must be a very last resort. Collect employment, work the gig economy, sell your furniture, and do anything else humanely possible to avoid that scenario.
Roll the 401K over to an Individual Retirement Account (IRA) hosted with your bank to remove it from your previous employer’s books.
With a rollover, 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.
Dealing with Investment Losses
When the market crashes, your investments are going to lose value. That’s the nature of the economy.
You will watch as the money in your accounts dwindles ever lower. Balance sheets will plummet, and you’ll fret over losses of 20%, 30%, and even more.
Even the most stoic investors may struggle to watch the drastic loss.
Don’t Pull Out of the Market
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.
Consider the difference between realized and unrealized losses before making rash decisions to pull 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 2008 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!
The world’s greatest investor, Warren Buffet, once said:
“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. You can get shares at bargain basement prices when everyone else is selling.
Consider Your Allocation
The most significant risk to staying the course lies in individual stocks.
Imagine the investors who decided to “stay the course” when Circuit City went under. They all lost because investors get paid last when a company files bankruptcy.
Individual stock holdings are a massive gamble during economic turmoil, as you don’t know which companies will survive.
Get out of individual stocks and put your money into index funds. These funds offer automatic diversification, giving you the best chances of recouping any losses during recovery.
Savvy investors can stick with individual holdings but should ensure they’re buying strong dividend-paying stocks that are unlikely to go out of business. You can find fantastic deals on solid companies during a market downturn if you know where and how to look, but most novices will fare far better by sticking to index funds.
Special Considerations for Those at or Near Retirement
Much of this advice primarily applies 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 will 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 assets. 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 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.
Thankfully, the market hasn’t crashed yet.
The best thing you can do is prepare yourself for the coming store. Deciding what to do when the market crashes depends significantly on how prepared you are before the downturn. Those with fully funded emergency accounts, marketable job skills, a profitable side hustle, and non-retirement investment accounts are in perfect positions to weather any coming storm.
Start preparing now.
Put something – anything- into an emergency account each pay period. Ask for more responsibility at work to make yourself indispensable. Explore all the different ways to start preparing to prevent the pending crash from destroying your financial security.
A recession, stock market crash, or economic downturn is a certainty; the only questions are when it will strike and whether you’re prepared to handle one.