How to Survive a Stock Market Crash

The Dow Jones Industrial Average traded to all-time highs before the Omicron variant spooked investors. In less than two weeks, the Dow fell about 7%. Stock market corrections are common, occurring nearly every three to five years and lasting approximately 18 months, while a bull market runs for about eight years.[1] Crashes are violent but short-lived. Wise investors can profit from those who panic.

How do you protect yourself against a bear market? Here are a few suggestions.

1. Don't panic! Market drops are painful but common.
2. Don't change your portfolio during the initial phase of a market correction. Let the market find its footing before adjusting your investments.
3. Cash is king. If you have a cash cushion, you're less likely to make rash decisions regarding your stock holdings. How much cash is enough?  My recommendation is to hold three to six months of expenses in cash. If your monthly expenses are $10,000, your cash account should be $30,000 to $60,000.
4. Buy bonds. While stocks fell, bonds rose. During the recent selloff in stocks, bonds rose nearly 3%. Bonds are a safety net.
5. Diversify your assets. A balanced portfolio of stocks, bonds, and cash will soften the blow from a market drop. During market drops, bonds perform well. In 2008, long-term U.S. government bonds rose 25.9% while stocks dropped 45%.[2]
6. Rebalance your portfolio. If you rebalance your portfolio, you can buy investments at lower prices. Rebalancing your accounts keeps your risk level and asset allocation in check.
7. Eliminate margin. One way to lose more money than you intended is to use leverage. If you margin your securities, I would eliminate it. Margin can worsen a bad situation by adding leverage in a down market.
8. Stay invested. The two days following the stock market crash of October 19, 1987, the Dow Jones Industrial Average rebounded 16%.  Despite the dramatic drop on Black Monday, the Dow ended 1987 in positive territory, and it has since risen 1,920%, including the recent selloff.[3]
9. Look for bargains. Is your favorite stock now 25% cheaper?  If so, consider buying the dip. If you're unsure what to purchase, buy a broad-based index fund like Vanguard's Total Stock Market Index (VTI).
10. Think long-term. You may own your investments for years, maybe decades, before you need the money, so think generationally.
11. Markets recover. The stock market has always recovered!  It may take time, but they eventually rebound.

Stock market corrections come and go, and the market is a long-term wealth creation machine occasionally interrupted with short-term pullbacks. Do not fear a downdraft. Instead, use it as an opportunity to buy excellent companies at enhanced prices.

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves." ~ Peter Lynch

December 6, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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