3 Things You Shouldn’t Do If the Stock Market Crashes | Smart Change: Personal Finance


(Reuben Gregg Brewer)

O S&P 500 e Nasdaq Compound both fell in a bear market, with each of these broad indices falling by at least 20%. Geopolitical tensions are high, inflation is sweeping and a recession seems likely. If there’s one thing you need to avoid right now, it’s panic. Here are three things you should not do during this or any market crash.

1. Don’t sell everything

If you’ve taken the time to create a stock portfolio with strong long-term prospects, then a bear market is a terrible time to sell. The key to remember is that the market and individual stocks tend to move along a sinusoidal curve. In essence, the good times are followed by the bad, and the bad are followed by the good. If you get caught up in the ups and downs, you increase your chances of getting in and out of the market at the worst possible time.

In other words, you will increase your chances of buying expensive and selling low. The goal is to keep buying big companies and keep them going to benefit from the long-term growth of the companies. If you do this and avoid indiscriminate selling during bearish markets, you should get well out of the market crashes. It may take a while, but history suggests that good companies ultimately reward investors well.

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2. Don’t time the market

One of the tempting things to do when markets are volatile is to try to buy in the lows and sell in the highs for quick and easy profits. This will be especially tempting if the market moves sideways for a while. Only there are no crystal balls on Wall Street. No one is smart enough to know for sure when the market will change direction in a sustainable way.

Yes, there will be reputable investors who correctly identify the bottom or top of the market … this time. But very few have done so on a regular and investible basis. For example, Cathie Wood looked like a genius not long ago, but now, she does Ark Innovation ETF it has dropped 75% since its 2021 highs, and the publicly traded fund (ETF) is close to 60% this year alone.

In the meantime, Hussman Strategic Growth Fund increases by around 18% to date. But portfolio manager John Hussman has been warning for years of a major market crash. So your “victory” this year is nice to see for shareholders, but if you call a bear market long enough, you’ll finally be right. This is very different from accurately identifying the peak of the market before a sale. In Hussman’s defense, this is not really what he tried to do, as he simply claimed that the market is trading at a historically high premium that would ultimately result in a bear market.

3. No bottom fish

Suppose you manage to avoid selling everything you own, as well as the temptation to try to time the peaks and valleys of the S&P 500. This is great and shows that you can follow your long-term plan. But what about all the great opportunities to buy stocks during a market crash? It’s very tempting, especially if you see a stock that has plummeted. Beware of wanting to buy yesterday’s winners.

That’s not to suggest that you shouldn’t buy shares during a bear market. For example, a company like Caravan it dropped about 90% of its 202 highs. It has to be cheap, right? The problem is that the company is bleeding red ink and burning money, and there is a very real possibility that it will go extinct in bankruptcy.

This is very different from going in to buy a business like Medtronic which has fallen by more than 30% since its all-time high. The medical device company is profitable and has increased its dividend annually for more than four decades, making it a Dividend Aristocrat. It has some issues to deal with, such as product delays and product recalls, but its business model has clearly shown that it is sustainable over time. Caravan? Well, he didn’t even prove he could make money yet.

After all, buy good deals with long, profitable stories that are for sale, often called fallen angels. Avoid buying the big “winners” of the bull market that have little history and are probably nothing more than a flash in the pan.

Control your emotions

When all is said and done, bear markets are very difficult to deal with emotionally. This is basically what unites panic selling, market timing and bottom fishing. Your best bet is to have a long-term plan and stick to it through good and bad markets. For most investors, the best plan is to buy good deals and keep them, no matter what the market is doing, so that you can benefit from their long-term growth. It’s easier said than done!

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Reuben Gregg Brewer holds positions in Medtronic and Hussman Strategic Growth Fund. Motley Fool has no position in any of the above actions. The Motley Fool has a disclosure policy.



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