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How to Survive a Stock Market Crash?
“Billions lost in a market crash”
“Worst Crisis Ever hits the Stock Market”
“Huge Crash in Dalal Street”
If you have been associated with the stocks market for a while, you might have heard or read such headlines in televisions and newspapers.Stock Market crash is every investor’s worst nightmare.
Seeing your hard earned money being wiped away right in front of your eyes is the worst sight.
Stock Market Crash not only takes away majority of your wealth, but also leaves you with countless sleepless nights. So are we mere puppets to what’s going on in the market? Is there a way to survive, or even better take advantage of this situation?
The answer, fortunately is, yes, and that is exactly what we are going to discuss in this post on How to survive a stock market crash?
There’s a lot of misinformation about what a market crash really means. While for some people a 5%-10% market correction is seen as a crash, for others a 20%-30% qualifies the definition of a market crash.
The truth is, there are some common characteristics every stock market crash has, which are explained below:
What is a Market Crash? Four Basic Characteristics:
Technically, a stock market crash has four major characteristics.
- A market crash can must lead to 30% to 60% correction in major indices(such as Sensex and Nifty)
- A market Crash lasts for a while, that is, the market may remain in deep red for at least a year. Of course, there will be some bounce backs as well, but all such jumps are short lived, called relief rally, only to push the indices further in red.
- They are mostly caused due to poor economic outlook as a result of an overheated economy. Every economy has a cycle, when it shows good growth for some years, and then remains subdued for long time. Stock market crash is usually caused by poor economic activity, high inflation and lack of jobs in the market due to poor business performance.
- Final, and the most important aspect of a market crash. Market crash are really hard to predict, and occur rarely. Just like a natural disaster such as flood, tsunami or an earthquake, we can only speculate about the probability of a crash, but cannot foretell, with accuracy, when the market will crash.
Market crash can catch us off guard, especially when everything seems fine and we least expect things to go bad.
It is this unpredictability of stock market crash that keeps us on edge of our seats, waking up at night, wondering when it’s gonna happen.
NOTE: If you want to learn more about, market crashes, and how they impact us in different ways, I would highly recommend you to read a book called “The Black Swan: The Impact of the Highly Improbable” by Nicholas Nassim Taleb, its a great read.
Before we move on to the next section, here is a brief summary of everything we have learned so far in the previous section:
Having understood the basics of how to survive a stock market crash, there are many ways you can not only survive a market crash but also use it to your advantage and make tons of money for yourself. Want to know how? Read on….
What to do in a Market Crash?
So you have invested your hard earned savings, and now market is tumbling down, taking everything you saved over the years.
I know it’s hard to stay calm in such situation. But what are you supposed to do? In order to survive a market crash, here are some points you need to keep in mind.
Keep Your Fears in Check:
“Be greedy when other are fearful, and fearful when others are greedy.” -Warren Buffett
The first point on how to survive a stock market crash is to keep your fears in check.
Investing requires more of a rational thinking rather than reacting emotionally to the situation. An investor must always try to keep his emotions away from his investment decision making.
What seems like a catastrophe today may look like a small blip on the screen in the years to come.
All of us remember the notorious global crash of 2008, which destroyed many investors. Ten years ahead, it looks like a small dip in the market. Don’t believe me? Se for yourself in the Nifty chart given below:
Times like these, most investors fear the worst and try to get out with whatever is left, trying to save their capital.
What they often forget is that it’s nothing new and history is just repeating itself.
If we look at the hundred year old history of the market, we have survived multiple recessions, two world wars, and uncountable natural calamities. What makes you think you won’t be able to survive this one?
The whole point of explaining this is that when you are investing in the market for long term, you need a very different approach and perception towards the market.
By keeping your fears in check and maintaining a rational mindset you can not only survive a market crash, but can also use this as an opportunity to make more money (How ? I’ll explain that soon)
“Stock market is a great machine to transfer money from the impatient to the patient.” -Warren Buffett
The second thing you must do while learning how to survive a stock market crash is to be patient.
Investing in stock market is not a hack or a trick that you can learn and implement to make tons of money overnight. It requires lot of discipline and patience.
You must be willing to accept the fact that volatility, ups and downs, market crash, all are a part of the market and if your not able to handle it, you are not prepared to be an investor.
Investing is like planting a seed, no matter how much you work on it, it will take its own time to show meaningful results.
Once you have good quality stocks in your portfolio, all you need to do is sit tight and stay invested, without worrying about daily price action in the market. Once the storm passes, you will see the sunshine once again.
Okay here is something people usually misunderstand. When I talk about keeping patience, I do not mean inaction or lack of supervision.
You have to keep tracking your portfolio once in a week or month, depending on your investment horizon.
Just don’t let the temporary under performance of your portfolio cloud your rational decision making, unless there is something significantly wrong with the underlying fundamentals of the company.
If you want to learn how to analyze the fundamentals of a company, please read the following blog:
Cut the Noise:
“You are right not because people agree with you, you are right because you get your facts right” -Warren Buffett
When you see a 4% correction in the market or the stock you are holding, it is natural to try to find the reason behind the market correction, and what you can expect in the future.
While its natural to be curious, I would say better try to avoid being bombarded by a barrage of information, opinions, and so called “Expert Advice” as they may confuse or scare you more than helping you make a rational investment decision.
Listening to too many opinions may cloud your judgement, you may get trapped into believing that you can time the market (which in reality, isn’t true) and invest.
As long as you are optimistic and sure of the bigger picture and your long term story remains in place, it is always in your favor to stay invested.
Disciplined investing and long term vision are the best ways to tide over short term volatility.
Before we move on, here is a summary of all the important points we have learned in this section:
So far you have learned important points about what to do in a market crash. But it’s not just surviving a crash, it’s also about using the adverse market condition as an opportunity and use it to your advantage, in order to get super returns.
Is it possible? YES! Want to know how you can use it? Read on….
How to Take Advantage of Market Crash?
“Every disaster is an opportunity” -John Templeton
By keeping four simple points in mind and following them religiously, you can not only beat the market blues, but also turn something often seen as a problem into an opportunity. Let’s move on to the second section of how to survive a stock market crash, and learn to conquer the market.
Look for Quality Stocks Available at a Bargain:
“Socks or Stocks, always buy them when they are marked down” -Warren Buffett
Markets behave irrationally, at times they are overly optimistic and other times they are highly pessimistic.
A rational investor takes advantage of such irrational behavior to find great investment opportunities in the market,
Every stock has a business behind it, which, in the long term, determines the price of the stock. If the business performs well, the stock price will eventually appreciate accordingly.
When the stock market crash, all the stocks also crash, irrespective of their size or quality of their underlying business.
What is interesting is, while the prices of such stocks correct significantly, the underlying quality of the business largely remains unchanged.
Such situations present a great opportunity for long term investors to buy great quality stocks at a bargained price, thus turning a market crash into a money making opportunity.
If you want to learn how to find good stocks trading at a bargained price, you can read it here:
Use Rupee Cost Averaging to Your Advantage:
As I have already mentioned earlier, every market faces a bad phase for some time, and this presents a great opportunity to pick good stocks at bargained price.
Most investors, even if they successfully select the right stocks to invest in, they find it painfully difficult to keep investing consistently.
Rupee cost averaging automates this process. What is rupee cost averaging?
It’s a very simple method where you invest a fixed amount of money regularly ina stock. If the price of that stock goes down, you can buy larger number of stocks for the same amount, lowering your average cost.
Consider this example, let’s say a stock of company X is trading at Rs. 100 per share, and you are investing Rs. 1,000 every month in that stock.
At this point, you can buy 10 shares of Company X. If the markets decline and the stock price of company X goes down to Rs. 80, with the same amount of money, you can now buy approximately 12 shares of Company X, (1000/80=12 approx).
It is the power of rupee cost averaging, that without committing additional amount, you can buy more shares at sa bargain price, definitely a powerful tool for small investors.
Since every market slowdown/decline is a temporary, it’s in the favor of a long term investor to
Take advantage of rupee cost averaging.
By purchasing shares regardless of price, you end up buying shares at a low price when the market is down.
Over the long run, your cost will “average down,” leaving you with a better overall entry price for your shares.
Dividends are a part of company’s profit that it distributes to its shareholders. Since dividends are usually in the form of cash, you can use the dividends received to re-invest in the stocks you own. This will supercharge your rupee cost averaging process.
History tells us, that dividends reinvested can have a huge impact on the overall wealth of an investor.
For more interesting details about dividends, read the following blog posts:
Before we move on to the next section, here is a summary of all the important points we have learned so far in this section:
Every coin has two sides, and investing in stock market is no different, while there are ample opportunities to make money, there are some pitfalls that you should be aware of and avoid being trapped into.
Things To Avoid During a Market Crash:
In this section of how to survive a stock market crash, I will explain some things that you should avoid doing in order to protect your capital, and will help you sail smoothly on rough waters.
Don’t Sell in Panic:
As humans, we follow the herd mentality where a hint of fear in the herd sends wave of panic in the entire herd, forcing them to get out of the situation and bail out to safety.
Investing in stock market is no different as it is also a reflection of our collective actions.
The moment we sense a danger, a panic takes over the market, and a selling spree starts. Everything, good or bad gets sold, pushing the stock prices down, irrespective of its underlying fundamentals.
Your job as a rational investor is not to panic, but to revisit the fundamentals and valuation of the stocks you own or want to own in the future.
If the long term fundamentals of the business are largely intact, and the current market valuations of the stock look attractive, it is time to go against the herd and start buying.
Famous investor and fund manager Sir John Templeton always used to have a list of stock he wanted to buy, under his glass table.
Every time there was huge market correction, Sir John Templeton used to calculate the intrinsic value of the company and its long term fundamentals. Once he was satisfied with the valuation, he would start buying those stocks for his portfolio.
The whole point of this is, just because the markets are red, it should not be matter of concern as its just a temporary phase, what you need to focus on is rational thinking and finding quality stocks to add to your portfolio.
Don’t Rush to Buy anything Cheap:
“It is far better to buy a great company at a fair price than a fair company at a great price” -Warren Buffett
It is the biggest mistake most investors make during a market crash, most investors start buying a stock that looks cheap in terms of price, without paying attention to its underlying value.
Just because a stock’s price has corrected 50-60% does not mean its cheap. A stock becomes cheap or expensive based on the underlying fundamentals of the company and its expected growth potential in the future.
Always look for stock that have quality business behind them, and if they are available at attractive valuations.
Avoid Timing the Market:
Another most common habit among investors is that they try to time the market, which means, they try to buy the stock at the bottom of the market cycle, where there is not much chance of a stock going down.
Historically, trying to time the market has almost always been a game investors are bound to lose.
There is no way to tell if the market has hit the bottom, trying to “bottom fish” the market is thus useless.
It is always better to stay invested in a good quality business, and add to your positions whenever you have capital to invest, as long as the underlying fundamentals of the company remain intact.
Once the market tides turn, you will see your portfolio growing each day, making you richer.
Before I we move on to the final conclusion, here the important points we have learned in this section:
Handling a stock market crash is more of an art rather than a skill. It requires lot of patience, discipline, courage and most important of all, a rational thinking and mindset.
Yes it does take some time and experience, and there will be mistakes, but don’t let that overshadow the financial freedom that awaits you beyond it. In conclusion all I can say is that in order to survive a stock market crash, before you think about conquering the market, conquer your own fears.
I hope you liked this post on how to survive a stock market crash. Do let me know your thoughts and opinions on how you handle your investment in a market crash. Thank you for reading.