Surviving A Stock Market Crash

The last 12 years have seen an unprecedented run in the price of equities. The stock market has averaged a 13 percent return over the past decade which is well above the historical rate of 9 percent per year. Investors have been rewarded with the doubling and tripling of their investment portfolios. It has been a great run but as any savvy investor will tell you; a bull market cannot last forever. There are signs that the market is becoming overvalued as value investments are harder to find. Companies are trading at multiples not seen since the dot com bubble of the early 2000’s. Take these steps to protect your portfolio and survive a stock market crash.

Avoid Meme Investing

Some traders were able to make money off of meme stocks, penny stocks, and junk stocks over the past few years. You could buy worthless companies and make some cash. It is getting a lot harder to make cash off of these type of garbage stocks. Meme trading is fun to play around with until you see your hard earned cash circling the drain. There are scores of burned traders still holding onto Gamestop Stock hoping for a return back to the $480 level. I doubt that this speculative stock will ever see the $500 level ever. If you want to save yourself some heartache, build your investment portfolio around quality names. Companies like Walmart and Nike may not be sexy but they generate solid returns, growing dividends, and offer the security to survive a market drop. Junk stocks are going to get hammered hard during the next market downturn.

Resist Your Impulses

There is a clear emotional connection between seeing the green plus sign of market gains and the red minus sign of market losses. The green plus sign brings a smile to your face and sparks dreams of an early retirement as you see your portfolio grow. Rising stock prices make you want to buy more shares to catch the rising tide. Seeing your portfolio awash in red has the opposite effect. Down days make you want to sell all of your shares to avoid losing every dime of your money. You feel uneasy and it can ruin your entire day if you allow it too.

Resist the urge to buy or sell when you are operating in your feelings. Take a deep breath, calm down, clear your mind, and do the exact opposite of your impulses. Down days are great opportunities to accumulate more shares and lower your cost basis. You can buy a great company at an even lower price. Up days are days to do nothing. Do not buy nor sell your position until you have reached your targeted price for the company.

Stay Focused On The Long-Term

A lot of people are confused about the difference between investing and trading. Traders buy a stock hoping to make a quick profit and get out. A trader will buy a stock on a Monday and sell it on a Friday. A trader will think that holding onto a stock for 30 days is a long time. Traders trade news, charts, speculation. Traders often buy and sell based on momentum. Investors are not traders. Investors will hold stocks for years waiting to realize a profit. Investors are not swayed by day-to-day ups and downs in the market. Investors are willing to ride out the highs and lows of an individual equity.

I have made money both investing and trading but have made far more money investing. My greatest returns have come from companies that I have been willing to hold for 3 to 10 years. Investing allows you to catch multibagger growth from companies like Facebook, Google, Square, and Uber. Investing gives you the chance to make 10x, 20x, and even 100x times your initial investment over time. Stocks do not go straight up. It is often a bumpy ride to major gains. You have to be willing to ride out the valleys if you want to reap the rewards of the mountaintops.

Trim Your Winners

Remember that “bears make money, bulls make money, pigs get slaughtered”. This means do not be too greedy. At some point, you have to realize a gain by selling some winners. If you have a stock that is up huge; it is okay to take some money off the table. For example, I owned shares of Facebook that I purchased at $40 a share. When Facebook’s shares hit $360, I trimmed some of my position. I like to sell enough shares of a stock to recoup my original investment and then hold onto all of the shares of profit. This way I am investing all profits and my original investment amount can be withdrawn. It is a nice way to maintain a position in a company and redeem cash at the same time.

Check out Investing vs. Trading.