How To Prepare For A Stock Market Crash

Being prepared for a stock market crash is not an over-night thing. Like an Olympic athlete, you can't wake up on the day of the match, do five pushups, prop yourself up with a hoo-ha in the mirror, and win big. It takes time to learn the skills, and even longer time to establish the muscle memory. The twist of the story is that knowing the skills and having the muscle memory to repeat them is not enough to protect yourself against big market crashes. It would help if you also build the emotional resiliency to deal with the ups and downs of the market. And, that's how a savvy investor makes her portfolio crash-proof.

​Starting to invest and crash-proofing your investments involves learning to think probabilistically, building the mental muscle memory to adhere to the process, and, more importantly, building the emotional resiliency to stick to the process when all hell breaks loose. In 2017, I wrote a piece about how to prepare for a stock market crash to demystify the process. The purpose of that article was and still is to follow the footsteps of an athlete that prepares for Olympic games. The only difference is that our Olympic is called a stock market crash.
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I'm refreshing the original 2017 post with the hope that it helps a new cohort of stock market investors to get ready for the next market crash. If you are starting to invest in the stock market now, this is for you!

Photo by Anna Goncharova on Unsplash

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It was a heated conversation for three days all day at Stock Card HQ. I'm not going to lie to you. We raised our voices a couple of times. What were we talking about?

It all started when the cautionary memo of the billionaire and fund manager, Howard Marks, landed in our mailbox. The man is a legend in the investing industry, and his cautionary tales are our bedtime stories. We read the memo, and the debate started. We were discussing Howard's note on the impending stock market crash. But, our discussion wasn't about what you are thinking! We were not debating whether a crash is possible or not. Neither, we were trying to predict whether the crash is this month or the next. All intelligent investors know a crash is always a possibility; it's not a matter of IF but rather WHEN. Knowing that a crash is impending, we were discussing how we would prepare our portfolio for a market crash. After hours of conversations, discussions, arguments, modeling, and researching how some of the best investors in the world have survived the past market crashes, we came up with our approach to crash-proof our portfolio. You know... how you baby-proof your house when a new bundle of joy is due. We wanted to share with you how we get our portfolio ready for when the market's bundle of joy arrives.

BEFORE:

• Accept at a logical and emotional level that a stock market crash is always a possibility. By nature, markets rise and fall. We cannot control such, nor can we prevent it. Let's go live our lives, nothing to see here!
• Come to peace with the fact that no one can predict why and when a crash happens. No amount of historical trending can give us insights into what will cause the next crash. History doesn't repeat itself, but it rhymes. We will most likely not have another crash because of a virus pandemic anytime soon. The next trigger is what no one pays attention to. If people could have seen the trigger, it would have been removed before it melts down the stock market.
• Invest in great businesses operating in an organically growing market at a time of peace, and stay patient with them at the time of crisis. The stock market follows the rhythm of the survival of the fittest in its rawest form. An economic meltdown takes a toll on all companies. However, those with great management, free cash flow, and strong competitive advantage, going after a growing market, will outlast the weaklings.
• In the time of peace, invest the money dedicated to investing, not the money you need for rent, mortgage, or car payment. We'd never know when the crash might come, so we cannot risk investing the money we need for our daily lives. Investing money is the stash you don't need for life as you know it. It's the money you dedicate to create a life you still don't know of it.

DURING:

• Invest when the crash happens! As much counter-intuitive as it sounds, when a crash happens is the time to invest. It is time that everyone is wary of the market. It's the time that the market as a whole is beaten down to lower than what it is worth economically. It is very likely that you won’t pick up stocks at the bottom, and after you pick up some stocks, they will continue to go down. That’s why you’d want to invest gradually and steadily as the crash pans out. This also means we need to start saving now for our crash-investing stash.
• Stop checking your portfolio at the time of crisis. No one enjoys seeing the red, downward arrow. It happens to the best of us. When it is red, it brings out the worst emotions in all of us. Perhaps delete that tracking app. Stuff your face into your pillow and shout. Pick up a hobby, or binge-watch a soap opera. The action of keep checking the fall won't bring it back up.

AFTER:

• Enjoy the sweet fruit of your steady, small, and gradual investment in companies that have solid operations and benefit from an organically growing market. However, following this approach, you are building a lifetime advantage.

Happy investing!

This article was originally published in 2017 in preparation for the expected market crash back in 2017. It is still as relevant as it was back then.