What to do when the stock market crashes
It’s May 9, 2022 and the stock market is… crashing? The Dow Jones Industrial Average has dropped -2% and the Nasdaq about -4%. Over the last 3 months it’s worse. The Dow is down -11.21% and the Nasdaq -26.6%. It’s a slow moving crash.
It’s times like this I come back to the advice of investors like Peter Lynch. He went through the biggest one-day sell off in stock market history. In 1987, the Dow Jones Industrial Average fell over 22% in what’s remembered as Black Monday.
His advice to investors has always been to ignore the ups and downs of the market. Lynch knew that over the long term the market goes up. In One Up on Wall Street he says, “Even if October 19 (Black Monday) made you nervous about the stock market, you didn’t have the sell that day – or even the next. You gradually could have reduced your portfolio of stocks and come out ahead of the panic-sellers, because, starting in December, the market rose steadily. By June of 1988 the market had recovered some 400 points of the decline, or more than 23%.”
This advice seems easy to follow. However, when the $10,000 you’ve saved for years goes to $7,800 in a few hours… it stings. In those moments you don’t know if it’s going to stop. The pain of loss urges you to hit the sell button.
Until you’ve been through a market crash it’s hard to follow Lynch’s advice. When I first started investing I was a panic-seller. Now, it’s a lot easier to stomach the ups and downs. Not only do I manage to stomach them, I look forward to the corrections. It’s the best time to buy stocks for cheap.
When you sell in desperation, you always sell cheap.Peter Lynch, One Up on Wall Street
Investing greats like Warren Buffett and Mohnish Pabrai echo this sentiment. Buying when everyone else is selling takes courage. However, doing it will super charge your portfolio.
I plan to write more about portfolio development. Keep an eye out for more on that topic. A lot of subscribers have asked about how to create a portfolio. If you have any questions about portfolio creation let me know. I’d love to get input from subscribers like you.