Really. Don't panic. During a stock market crash, one of the best things you can do is stick to your plan and … do nothing.
Today, January 24, 2022, was a bit of a wild ride. Stocks dropped! Then they recovered! And it was on the heels of a rough previous week. So, what should you do during a stock market crash? Well, my big plan is to, as always, do nothing.
As an investor, you're going to end up seeing a number of stock market crashes. And recoveries. Sometimes those things happen on the same day.
Stock market crash? Don't panic!
Rather than panic, though, it's time to clutch your towel (hey, that's a quality Hitchhiker's reference!) and take a few deep breaths. As always, selling low is not the best investment strategy out there. Now might be a good time to do a little bargain shopping, if it works for you, but if you've got an ongoing dollar-cost averaging strategy, there's no reason to change that up and panic-sell at the first sign of a drop.
Has the market reached a low? Who knows? But if you have a few stocks or funds on your list, and you've just been waiting for them to drop a little in price to reach your desired valuation, picking up a few extra shares when the market falls can make sense. I generally hop in once the market is down at least 5%. Deploy a little extra cash, while leaving all my regularly scheduled investment programming intact.
It's hard to remain calm when you watch a stock market drop like that. However, it's best if you do remain calm.
One of the ways to stay calm is to create a properly diversified portfolio, and create an investment plan that you can stick to through thick and thin. Since I'm a boring investor, the bulk of my portfolio is created with the help of ETFs. I use Acorns and M1 Finance for much of my portfolio and I recently transferred the bulk of my retirement from Betterment to Fidelity. (I still think Betterment is great. You can read my Betterment review and see how I used to use Betterment to help me work toward multiple financial goals.) On top of that, I have some experiments, with cryptocurrencies and some individual stocks. I also have some REITs.
Stay calm and keep investing
Rather than freak out and sell everything, I'm staying the course. That's easy to do when you're lazy and most of your investing is automated. Sure, I'll check and see what's going on. But I have a plan. I've got levels at which I'll take profits on my experiments. Which is why I'm not freaking out about the crypto crash — I've already taken profits. Other than that, my automatic investing carries on. Today I was too busy to worry about deploying my extra cash, so I didn't get any new deals. But it was automatic investing day, so I got the low price anyway.
I've got more than 20 years before I tough the long-term money in my IRA and my HSA, and over time it's likely to grow through the magic of compounding returns. No matter what stock market volatility is doing in the short-term, over the long run things tend to smooth out a bit. In my taxable accounts, I might use the money for travel or for an emergency, but if I sell low for that, I can take a tax deduction.
A strategy that includes low-cost funds can be a great way to prepare yourself for the long haul, and it can also be a way to keep you from freaking out too much when the markets hop on the roller coaster.
Even if you want to diversify into something like gold or real estate, or anything else, a core investment of broad-based funds can help you stay on track — even when everything seems to be falling apart.
Bottom line — have an investing plan
A stock market crash can be scary, especially if you're a new investor and you're not used to the ups and downs. However, being a boring investor can help you weather the storm.
Your first step is to figure out the purpose of your money, and know how you plan to use your investment accounts to meet that purpose. For example, my accounts include:
- Tax-advantaged accounts: IRAs and HSAs. For me, these are long-term accounts. I use them to build wealth for the future. The Health Savings Account is designed to grow until I need healthcare costs in retirement. The IRAs are for, well, retirement. Every month, I put enough in these accounts to meet my long-term wealth goals. They are entirely index products.
- M1 Finance: This account uses a different index product and a REIT. This is my travel account. It's a taxable account. When I go on a big trip, I liquidate some of this money to cover the cost. Every week, money is automatically transferred to this account and invested.
- Acorns: I do have a SEP IRA here, as part of my overall long-term strategy. But I also have a taxable account. The taxable account makes use of small roundups and a small weekly investment. This is my spontaneous account. If I feel like taking off for a long weekend or do something a little extra, I get it out of this account.
- 529: Since my son is in college now, I'm not putting money in there anymore. For that account, I use a bucket strategy. Money I'll need to pay for the next two semesters is kept in cash, so I know I have it when I need it, without the need to cash out during a drop. Money I'll need the two semesters after that is in a bond fund. The rest is in a stock fund so it keeps growing. Every semester, I check to see if I need to rebalance the buckets.
- HSA: I use Lively for my HSA, and those investments (managed through TD Ameritrade) are meant to mainly grow over time so I can use them — tax-free — during retirement. Side note: the Health Savings Account is my favorite account.
- Other accounts: For experiments, I have Robinhood, Coinbase, and Stash. Mostly, I try to take profits when I get them. I don't make regular investments in these accounts. I just add some money to the account if I want to try something. Or I use the profits I've made to reinvest for a different experiment. If I have to sell at loss, I just use those losses to offset some of my gains. But most of my portfolio is boring.
At any rate, I have a plan, and I stick with it. When the market goes for a rollercoaster ride, I keep making automatic investments. I rebalance, but only do so once a year. My experiments require a little more attention, but since I don't day trade, I only worry about it when I want to do something different. But a market crash isn't the catalyst for something different.
Think about what your accounts are doing for you. Create an investing plan. Then, when a stock market crash does rear its ugly head, you're less likely to make decisions based on fear.
PS – If you're interested in taking your first steps as an investor, check out my guide on how to start investing.