How to get through a stock market crash – and benefit from it
Wow, the stock markets have been a terrible mess.
Given markets are a mess, are you able to adapt?
How might you survive a stock market crash if or rather when it happens?
Read on, to learn how to do that in this post.
How to get through a stock market crash – and benefit from it
On our Canadian side, we triggered market circuit breakers to halt trading in recent days.
In the U.S., the stock market dropped thousands of points in rapid successive trading days and remains well into bear-market territory within just a matter of weeks. It’s as almost if the market jumped out of a plane with a faulty parachute and spiraled out of control to earth; only some mild turbulence kept it from a total free fall.
All havoc, no sanity
These market dives in very short order made me reflect on my own investing journey and how I might be able to survive this stock market crash. For today’s post, here are my ideas on how to get through a stock market crash – and benefit from it.
1. Learn from history – reset your expectations
A sudden stock market crash is quite unnerving, but I don’t think it’s a sign of imminent full-on financial collapse. At least history tells us so. You’ll see from the chart above, recent weeks have been very messy to say the least. But over many years of investing in equities, the chart actually looks like this:
I’ve highlighted near the bottom of the 2008-2009 Great Recession for reference.
Although it’s very difficult to wrap your head around this fact and behave accordingly, stock market history consistently tells us the financial markets do eventually recover. And, after they recover, looking back through time, they continue to deliver rather predictable long-term returns. Here is what the U.S. stock market has returned by the decade and from what:
Even near-term, our Canadian and U.S. stock markets have been a very good place to be to build wealth:
|Index||Proxy Fund||5-year return||10-year return||Since inception|
|S&P/TSX (Canada)||XIC||6.27%||6.77%||6.53% (2001)|
|S&P 500 (U.S.)||IVV||11.65%||13.50%||6.15% (2000)|
Source: iShares site, up to December 2019.
I firmly believe this is why you need to stay invested throughout a stock market crash.
What goes down will (eventually) go back up in time.
2. Learn from history – buy when stocks are on sale
The fact that equity markets have done well over the last decade, let alone generations (despite the occasional very scary bump) should be a reminder that stocks remain a great long-term investment to build wealth. But as we all know by now, scary bumps can and do happen. As in now.
This means selling stocks in a panic (also as in now) is probably not a wise move. Ideally, successful investing is about buying something at a low to modest price and watching that asset accumulate in value. That means staying investing like I mentioned above but that also means buying low, selling high (if you need to sell at all). When you sell after a market crash or a major correction you do just the opposite.
You and I both know by now we cannot control market swings. We can control our investing behaviour. We have no idea of when the market will swing nor by how much. We only know that it will.
The best time to buy stocks is when you were going to buy them anyway.
So, I believe, you should consider stock market crashes as a buying opportunity. I mean, a market correction or crash simply signifies stocks are on sale per se. Consider the following and your behaviours associated with these statements:
- Would you panic sell your house if it dropped 20% in value for a few months?
- Would you buy more gas for your car if it dropped 20% at the pumps?
- Would you buy more groceries and toilet paper if it was 20% off?
You know your answer and I know yours too.
So why is the stock market different?
Much has been written about buying in lump sums being somewhat more favourable than any dollar-cost averaging (i.e., buying-in slowly) during a market correction.
To be honest, I don’t care what you pick. Just invest.
As Jonathan Clements, a former Wall Street Journal columnist once said:
“If you want to see the greatest threat to your financial future, go home and take a look in the mirror.”
This implies that successful long-term investing is directed tied to your emotional fortitude and behavioural discipline. While poor investing decisions can and may very well occur from time to time, it’s important to learn from them. It is therefore imperative that investors recognize their behavioural pitfalls before committing to any decisions which can affect their investment goals.
One of my favourite, easy-to-read books on the subject of building wealth is targeted to millennial investors but applies equally to investors of all ages is If You Can. This book is designed for modern attention spans. It’s only 15-minutes of reading and gives you information you need to be a successful investor in a few pages.
You can read an overview of this book and download a FREE copy of it (yes FREE) here.
3. Learn from history – continue to improve
How high your returns could be (for a long-term stock market investor) over the next 30+ years is not really up for too much debate – based on market history. A 100% equity portfolio in the broad U.S. stock market is probably going to deliver close to 7% annualized (plus or minus a bit) and likely 3-4% in real returns (after inflation is factored in) in the coming decades.
I can say with more confidence that I will not find myself wealthier if I do not learn from my own investing history and continue to improve upon it over time.
I got a few reader emails over the last few weeks and I thought I would share them before I share my next steps in this current market correction for context – what I’m doing to improve. Emails adapted only slightly for posting.
I have read a lot about the stock markets. I have been investing since 1985. One question that seems to go unanswered is what should you do when your investments have increased substantially in value? This question comes up as we see the markets plunge, as they have done several times since 1985. I see my total portfolio substantially drop in value, and I know it will eventually return to that level or more.
I am wondering if there is any strategy to capture some of those gains? I have good quality investments, no get rich quick stock picks, and I invest regularly, every month. I know the credos – stay the course – don’t time the markets – the market has returned an average of 9% over 72 years – the value will return in 6 months – but they seem like messages meant to keep you in the game. Maybe that’s all it is, you are playing a game and these are the perennial rules. Something to remind yourself about as markets correct.
Of course no one likes this type of market but it can be made more manageable if you have a catastrophe plan. I have had such a plan for the last 6 years. Don’t want to use it but if you must…..
For what it’s worth, my plan has consisted of converting my RRSP into a RRIF early (age 68) rather than mandatory age 71. With over $1 M invested even after this market correction I felt it (the market) absolutely had to come down in size (or I’d get too much income in my later years).
I stressed tested it so if it lost 50% of my portfolio it would still deliver a good $25,000 a year, + Canada Pension Plan (CPP) + Old Age Security (OAS) = $42,000 per year base. My non-registered account (like you) churns out dividends. That account gives me about $20,000 in dividends and if these dry up I will rely on my cash in hand to supplement my yearly base. I can last a good 10 years that way until the market returns. Not really worried but would obviously prefer steady growth. So would everyone else!
What is clear from each of these readers if they’ve learned to adapt and improve. They’ve learned from market history, they’ve learned to embrace stocks, and they’ve learned to keep cash or fixed-income for the inevitable market crash or correction.
From the Elements of Investing:
“As in so many human endeavours, the secrets to success are patience, persistence, and minimizing mistakes.”
So what I am doing in this market correction?
I’m going to buy more stocks and ETFs.
While I have a plan to increase my cash wedge in the coming years, something you can read about here – how much cash should you keep,I plan on buying more U.S. stocks or low-cost ETFs in the coming months.
By increasing my diversification and continuing to improve upon it over time, I will further mitigate investment risk while realizing my goals along the way. Likely the best way I can do this is via a broad-market index fund.
Paraphrased from investing guru Charles Ellis:
The buy-and-hold investor who prudently holds a diversified portfolio of low-cost index funds through thick and thin is the investor most likely to achieve their long-term investment goals.
How to get through a stock market crash – and benefit from it
At the end of the day, I have no idea what the future holds. I’m far from a perfect investor.
During times of market euphoria or market crisis I’m going to continue doing what I’ve always been doing as simple as that may have been:
- I will continue to pay down debt to become debt-free.
- I will keep savings automatic for investment purposes – putting money aside every month.
- With money ready to invest, I will periodically buy stocks and equity ETFs.
- As part of my improvement measures, I will consider buying more broad-market U.S. indexed ETFs to remove individual stock selection risk and increase diversification.
Learning to live with stocks and buying more of them when they are on sale, will reward my future financial self. I suspect the same will apply to you in how to get through this stock market crash – and benefit from it.
Excellent advice as usual, Mark.
Hard to know where to invest or hold tight as recession is looming. Keep cash in the bank or invest in small tranches??? We just have to hang tight for now while waiting to see where the stock market is heading to!!!
Good luck to you.
Gosh, Ken, I wish I had some answers 🙂 I think to your point I will just try and hang-tight and stay with my plan. Own what I own, buy more of the stocks I own (likely more energy as a hedge in 2023?) and keep some cash on the side just in case!
Stay well 🙂
The market, both stock and housing no longer reflect the real world. Liquidity, thanks to central banks printing money, is what is keeping the markets propped up.
I highly recommend watching Steve Sactksy’s youtube channel, most videos are 10 mins long. He speaks mostly about the housing market.
There is certainly a disconnect isn’t there Rob?
I look after my son’s RRSP. Since 2010, he has not made any contributions or withdrawals. In Feb. 2020 his RRSP hit an all time high. On March 20, it was down 29.3%. He is invested in blue chip, dividend paying stocks such as TD, BNS, MFC, BCE (both common and Pref), many ETF’s such as XIU, CDZ, precious metal shares such as XGD and Wheaton PM, a REIT and a TD US Index Fund. All dividends are reinvested in shares (DRIP program). His dividend income is just over $12 000 per year. On March 20, 2020, his balance is about the same as it was in mid 2012. After 8 years, he is back where he was in 2012. All income and capital gains have been lost during this period. I will keep him in his present portfolio and stay the course and HOPE that the market will recover as it has always done but it is very discouraging, both to him and me. Any comments?
I’m a big fan of XIU myself Barry. I used to own it, lots of it, until I “unbundled” that ETF to own all most of the top-20 holdings in XIU directly myself.
“On March 20, 2020, his balance is about the same as it was in mid 2012. After 8 years, he is back where he was in 2012. All income and capital gains have been lost during this period.”
Yes and no. Sure, the portfolio value is down but I consider focusing on the income derived from the portfolio to keep your spirits up. If your son’s time horizon is >10 years, I don’t think there is any major reason to worry. Things will come back eventually. There will be “winners” and “losers” as always in the stock market. When that occurs, when we will find out, I just don’t know.
I would advise you to hang in and if you’re really worried about the portfolio value, maybe buying a bit of bonds or increasing the cash % in the portfolio will make you feel a bit better near-term.
FWIW, I know some retirees who are down a few hundred thousand dollars in this market. They are not selling. If anything, I have heard they are cutting back expenses a bit to find ways of buying more equities.
Stay safe and thanks for being a fan,
BTW – very good video on this page here – have you and your son watch the first 1:15 of it 🙂
This is a great article and will benefit a lot of people! Very well written and well thought out. Keep up the fantastic work.
Thanks for the kind words Steve! Tweeted that 🙂
Stay well and we’ll connect more in the coming months. Got some ideas for blogposts for you to contribute to, if you care to!
We got the same plan. I am putting my money in in <10% tranches and trying not to buy more than once a week. Got burned a bit when it first started to plummet.
I figure we have another 10-20% to go. I put on Twitter a while back I think the bottom for the TSX could be as low as 8,200. I’ll reveal in my Weekend Reading edition what I purchased in my RRSP 🙂 I’m now saving up more money (a few $k) to make another purchase this spring. Have to go RRSP for my purchases since TFSA full and I don’t want to keep adding to non-reg. due to taxation.
One indicator of volatility that was mentioned to me recently is the VIX. Apparently it can help identify when investors start to protect downside and such. Something to look into. From what someone told me, it was showing signs on Feb 24.
That can be a way to lock some profits as December and January were crazy valuation when you look back.
Very interesting…thanks for the update. I owe you an email 🙂
Hang tight my friend.
We have one year and two weeks remaining for my husband to be on salary. So I am happy that I moved all of his Defined Contribution pension plan contributions to near cash late last summer. Whew. But the question will be, when do I move it back into something else? the options are balanced fund, Cdn equity, foreign equity or bond funds. As soon as he actually retires I want to move it away from the company’s control, but you can’t touch it until then.
But I feel really sad for our daughter, she is 25 and has been a great saver since she was 11 and started a paper route. Then added in lots of baby-sitting (she was popular with the kiddies), didn’t get a proper salary job till the end of highschool. But she always had more money than her friends who worked. I made her buy her own tv, camera, clothes etc, yet she still saved lots. Lived at home during university, and I think she had saved about $100,000. She wouldn’t let me know the amount a couple of years ago. She is very sad as she was thinking of buying a place of her own soon, but now says that won’t happen.
One of her older brothers hasn’t saved a cent and has a lot of student debt, so he doesn’t worry about it, lol.
Have you considered a growth fund: XGRO, VGRO, ZGRO for that money? Might be a good idea. All the upside with stocks and downsize protection with 40% bonds. Lazy investing too!
Hey Mark, I’m sure you know this and just made a little slip but they’re considered the growth etfs @ 80/20 equity/fixed income
Balanced 60/40 are XBAL, VBAL and ZBAL
Yes, sorry, I did correct that comment, meant to say “growth” vs. traditional “balanced” – thanks for the correction!
The thing with the defined contribution pension money, is that you have to buy one of the administrator’s mutual funds. You can pick a balanced fund. But I really don’t like someone else having control. If I could control the money now, I would be buying some Canadian dividend payers.
I put my wife into two indexed funds with her DC plan, one CDN and one U.S. The rest is in 30-40% bonds. That DC plan has returned/did return before the crash >7% for the last 10 years. It has returned >6.5% over the last 20 years. I thought that was pretty darn good.
Well said Mark – just invest! Might leverage a bit. Stay healthy.
Indeed. Stay healthy all!
Great insight, Mark. We’ve been anticipating a market downturn, though certainly never predicted it would be related to a global pandemic like this. We’ve kept a bit of cash on hand for this very reason, and are grateful we’re in a position to buy “on sale” as you put it. Thankfully, I have ample time to work while the market recovers, though I know others are not as fortunate.
Take care of yourself and your loved ones.
Ya, definitely didn’t see this one coming Elise! I will be buying some stocks or ETFs soon and again this spring and summer.
How are you doing through this? Any short-term plans?
Buying anything Dale or letting the portfolio runs its course?
“We can control our investing behaviour.”
Absolutely! Time to practice some “financial distancing” and stop looking at the markets/accounts for a few months. If you’re in a well diversified portfolio then there’s nothing to be done but rebalance periodically (ideally on a set schedule or automatically using an all-in-one ETF), keep dollar cost averaging over time, and just wait it out.
“Financial distancing” – good one.
Buying anything Owen? Looking forward to that upcoming post of ours!
Very good words of wisdom in these trying times Mark. Its a normal cycle in the investing world, although it rarely feels like that. Hopefully the virus doesn’t harm or kill as many people as expected.
Like many investors over the long term I am relying on a mix of income producing investments and capital growth, but so far have relied on income only. This is our first “down period” since retiring 6 yrs ago, and I plan to soon use the opportunity to rebalance with some cash and sale of FI instruments for more equities.
Some of our equity positions are being dripped for longer term and others generate income we spend, so if there is prolonged bear we will pick up a few extra shares at lower prices.
I suspect with your mix of equities and fixed income, you are VERY well positioned to not only ride this out but flourish.
I figure I have ~ $8,000 or so in RRSP contribution room for 2020 tax year. If I can max that out before the summer, and buy some ITOT or MSFT or MDT or all three I will be very happy. TFSA maxed so nothing I can invest there. Don’t want to add more to non-reg. until RRSP maxed.
Other than that, paying down debt and letting my DRIPs buy more shares commission free in the coming quarters.
I hope that plan works!
Thanks, we’ll see. My wifes work pension gives us peace of mind now too, although the funding ratio will take a beating for a while.
I was wrong in what I said earlier. There was a short down period end of 2018. Early 2019 I bought more shares of several beaten down stocks in our TFSAs and also unregistered.
Your plan to push forward is excellent. Capitalize as much as possible on this!
Best wishes to you and all your readers in hanging tough and following a good plan.
I will try to buy more stocks and low-cost U.S. ETFs as much as I can. I will reveal what I purchased in my RRSP soon in fact, as part of Weekend Reading.
I’m back in savings mode now, trying to save up more $$ to fund RRSP this spring.
Gotta stick with my plan!
Nice summary Mark. How one is invested really determines how one might react to the current market. If capital appreciation is your main objective, these will be tough times and it could take years for your holdings to recover. As long as you don’t need to sell to cover expenses, wait it our or take advantages of the lower prices to reduce your average costs.
For Income investors this is the times one dreams of: Dropping prices and Rising yields. You’ll be able to buy those stocks which were always to expensive or add to your current holdings and grow your income. Even if you don’t have cash, your dividend reinvestments will add more shares and grow your income.
Yes, there may be some dividend cuts, but I’m confident that the quality dividend growth companies won’t be among them. Me, I hope the market stays down for an extended period.
“As long as you don’t need to sell to cover expenses, wait it our or take advantages of the lower prices to reduce your average costs.”
That’s the plan. For dividend paying stocks I have my eye on MSFT and MDT. Maybe some BLK if I can get enough together for 10-20 shares.