The Stock Market is Going to Crash, Don’t Screw Up

The stock market is going to crash, but I’m prepared because the last time I learned the hard way. It was March of 2009, we were in Hawaii and the stock market was on a tear. We had rented a house on the eastern side of Oahu where we could snorkel and kayak from our backyard. And after a year of heavy losses the stock market crash was finally coming to an end. Everything was right in the world, but I was feeling ill – I had just realized my worst financial mistake.

The stock market is going to crash, are you prepared?

Back in 2008, I considered myself a savvy stock investor. I was trading in and out of positions, often using options to further leverage my bets. Much of my spare time was spent reading financial news and tracking stock tickers. Conversations with friends revolved around the hottest stock tips and our next trades. I had been doing this for years, and was making good money. But 2008 was the start of something I hadn’t seen before – the stock market was about to crash.

After an insane run up, the housing bubble burst, shuttering some major banks and bringing others to their knees. Over the course of a year, the S&P500 shed half of its value. Day after day, I watched the financial news, only to hear talking heads spewing doom and gloom. The few wise investors advising to stay the course were drowned out by the mania.

What not to do when the stock market crashes

I held on for months, watching my life savings shrink by thousands of dollars each day. Everyone I knew thought the market was going to keep dropping. Finally the pain was too much for me. I traded out of several stock positions, and immediately felt relieved.

The stock market is going to crash, don't buy high and sell low.

The stock market is going to crash, don’t buy high and sell low.

A few weeks later, we went on vacation to Hawaii. In between snorkeling and kayaking, I saw on the news that the market was making a recovery. I was in an awesome place and the market was finally turning around. However instead of euphoria, IΒ felt anguish. It was painful watching all of my stocks sink during the market correction, but seeing that I had locked in my losses by being an idiot was excruciating.

This wasn't the time to be stressing about financial portfolios. The stock market is going to crash.

This wasn’t the time to be stressing about financial portfolios.

I quickly realized my screw-up and started hoping that the stock market would crash again. I wanted a chance to undo my mistake. But there wouldn’t be another dip. This was just the start of a long bull market. I wouldn’t see the prices at which I had sold ever again. This was a painful but important lesson. If you want to sell, you better have a good plan for buying back at a better price. Given the US stock market is always going up, it’s a big risk to get out of the market expecting better prices, especially if the market has already taken a nose dive.

But I like to learn the hard way, and this was an expensive lesson I don’t want to forget. I committed to investing in stocks rather than trading on my instincts. After having missed the first part of the recovery, I plowed my cash back into the stock market. I was lucky to catch the rest of the bull market, and our investments carried us to financial independence allowing us to quit our jobs.

The stock market is going to crash, invest for the long term

These days, I primarily invest in index funds for the long term. I dropped my ego and hung up my trading shoes long ago. It’s saved a lot of time. I no longer spend my days watching financial news, studying quarterly reports, or tracking stock tickers. Being invested for the long term also means there is nothing to burden my mind when on vacations. The losses that I incurred from my mistake are unrecoverable, but I consider them a paymentΒ for my education.

 Don't loose your tail when the stock market crashes.

Don’t loose your tail when the stock market crashes.

But seriously, is the stock market going to crash?

As I write this, another bubble is forming, and another stock market crash is approaching. I don’t have to look at the PE 10 or study any financial reports to know it. It’s something I can guarantee because it’s the nature of the market. When this next crash does come, it’s going to be painful, and for new investorsΒ it will seem like the apocalypse. Huge amounts of money will disappear in days, and the media isn’t going to coddle anyone.

The stock market is going to crash, but you don’t have to lose out

I learned the hard way, but not everyone has to. The stock market is going to crash, and when it does all hope will be lost. If you despair and sell, you might feel some relief for a while, but the pain you feel when you realize you’ve locked in your losses will be ten times worse. ‘Buy low, sell high’ seems like a basic mantra, but many people will be selling their investments at massive discounts. If you can handle the pain, and overcome the instincts that every cell in your body will want to follow, you can be one of the sharks gobbling up their lunches.

45 thoughts on “The Stock Market is Going to Crash, Don’t Screw Up

  1. Oh noooooo. Sorry about this, Mr. Crazy Kicks. That’s such a horrible sinking feeling. I was reading a few books on investing and they said the safest bet is to approach as an investor instead of a trader. Trading is watching the stocks religiously and buying/selling pretty often in a bid to “beat” the market. But investing is more of a long-term approach where you account for market fluctuations and hang in there.
    The Great Recession was suuuuch a scary time for everyone. I know another recession is bound to happen quite soon, so hopefully we all learned our lesson during previous lean times. So don’t stop contributing to retirement, saving, and investing (long term investing, that is).

    • Must be a good book, that is some wise advice. Trading in and out of positions is closer to gambling than investing. Just make sure to choose solid investments you are willing stick with when the mayhem comes πŸ™‚

      • It’s great advice. I think it might have been Buffett who said something to the effect of “I’m comfortable holding our investments even if the market doesn’t open for 10 years.”

        That’s some sagely advice there. Buy with the intent of holding for decades regardless of what’s going on. Thinking about that, you’ll make far smarter decisions.

  2. My big fear is for when that next crash comes because I’ve personally never actually been an investor during one. I do tell myself that I won’t freak out, but how can I really know?

    One thing, for someone like me, a dip would actually be pretty good, assuming I don’t lose my job. I sometimes envy the folks who got their first jobs in 2009 and have been investing ever since.

    • I think you’re in a better position by thinking about it and preparing yourself now. Being invested for the long term and taking a passive approach helps. If you are actively trading, there is a bigger chance you will try and “fix” things by following your instincts.

      After this lesson, I spent the rest of my career hoping the market would fall rather than rise. It’s better to get stocks cheap when you have good income. You’ll get your chance at some cheap stocks soon enough πŸ™‚

  3. As an investor I have survived both the 1986 Black Monday Crash and the Housing Bubble Crash. I took a licking, but my portfolio is still ticking. Of course having a solid job and regular income during these periods are key and can make them great investing opportunities. The correct diversification for ‘your age’, and continous regular investing lets you get in on the bottom to ride it back up. But you need the time. Emotional trading is not the way to adjust your portfolio. The real issue is having the guts to start moving away from a Bull Equity Market when retirement is nearing. Those that want ride the Bull into retirement (other than for inflation fighting) may just get bucked off and land on their butts. Stay the course, rebalance, reap profits when you can. As I read recently ‘no one loses money taking profits’.

    • Emotional trading certainly isn’t a way to invest. Having experience is a big help, and I gained a lot of wisdom quickly during the last crash. Sticking with an allocation and only re-balancing is a great way to stay out of trouble πŸ™‚

  4. Woops! That was a doozy of a mistake Mr. CK. I hope it wasn’t a significant portion of your net worth.

    This post goes right along with my recent post on financial mistakes…I’ve made plenty over the years, but thankfully most were pretty small. I hope yours were too!

    Not to brag, but during that same time period I made a few of my best financial decisions ever. Instead of selling, I started plowing cash into the market…like one of those sharks eating lunches you described.

    • Nice move!

      Luckily I only sold out of a few positions, and realized my mistake in time to mitigate the losses. The sharks got a few digits, but no limbs.

      Reflecting on the situation, I probably came out better off. It was a kick in the butt that I needed. As a result, I got smarter about my investments, and was motivated to increase my savings rate to make up for the mistake.

  5. I had just started at megacorp in fall of 2008 and all of the old guys in the office were moaning about how much money their portfolio’s were losing.

    My mentor was the worst. He checked it EVERY day, usually mutliple times a day followed by, “Oh man, I’m down $250k!!”. Only one of my older coworkers told him, “Quit checking the market everyday, it’s doing what it does. You’re not retiring in 5 years, so just start buying more!”

    Side note, this was when Mrs. SSC and I started dumping any extra money into the market. Ahhh, those gains have been nice. I hope a crash comes sooner than later so we can load up again before we dump our incomes. πŸ™‚

    • Sounds like the guys I was working with. The best thing to do in a downturn is to ignore the news, and panicking co-workers πŸ™‚

      I was hoping for one more downturn before quitting, but it didn’t happen. I’d probably be most tempted to start working again if stocks were on a fire sale. I’ll be hoping on a nice big market crash for you πŸ˜‰

  6. I think you are right about being mentally prepared. Because the crash is a long and painful process. I knew a lot of people who bought more stock after the markets were down 20%, only to want to throw up as the prices kept dropping. We were luck to jump in 2 months before the bottom, and our losses recovered quickly. But Mr. Mt still wanted to throw up. I have been holding more cash because everything feels so darn expensive, housing and stocks alike. We invest our Roth IRA max each month, but often hold the rest till we find a house or stocks prices that seem reasonable.

    • I think “wanting to throw up” is a good description of how it feels when the market crashes. Even when you are doing the right thing, it feels wrong. Good job at sticking with your guns πŸ™‚

  7. 2008 was the year I moved to the U.S. and I had no savings here. I had no positions to worry about. Yay? I did have investments back in India, but those were the days I was financially, what is a polite word…..dim. I never checked on them and had no idea if they were taking a pounding or growing. I wasn’t adding to them, and I just pretended that they did not exist. I am theoretically all prepared to handle the next crash like a big girl. Only time will tell if I end up being a shark, or if I turn into a headless chicken.

    • Ha, I don’t know if I would call that financially dim. Ignoring the markets and letting your investments ride was the right move. Even if you didn’t realize it, you were a better investor than people who thought they were good with stocks πŸ˜‰

  8. Multiple studies have shown that returns are most significantly tied to investor behavior, not market choice. Keeping to your investment plan and within your risk tolerance is key. In 2009 my mom sold out of her small investment fund and into cash. She still doesn’t recognize her mistake, but she handed over the investing reigns to me.

  9. I’m kind of praying for a crash! I’ve only had my index funds running for a couple of years, so if they crash I’ll just consider it a sale. I don’t need to take anything out for 5-10years. In theory if there is a crash it will throw my portfolio balance horrendously out of whack. Then I’ll buy more (at a discount!) to rebalance.

    That’s the plan anyway. Easy enough to say now with a cool head. Hopefully Heart will keep quiet and let Head lead the show when it finally comes.

    • Hey LadyFire – Interesting strategy. The market definitely feels toppy and valuations are overblown, but curious if you have a timeline on how long you are willing to wait to rebalance. If your time period is 5-10 years, and you have the discipline to hold through a cycle, average returns are on average higher by getting your cash in as soon as possible than trying to pick the perfect time in the market. As Mr CrazyKicks explained here, we unfortunately often think we are smarter than we are when it comes to timing the inflection.

      • Choosing a set allocation, or percentage of stocks vs bonds, based on your age and risk level is a solid plan. As the market changes its OK to swap equities to maintain your allocation. Sticking with this strategy would mean that when markets go up, you sell some stocks to shore up your bond allocation. When markets go down, you need to sell some bonds to buy more stocks to rebalance your allocation.
        I plan another post to cover the strategy.

        • Thanks for the response! Totally understand choosing a set allocation and trading to maintain it as the market moves as an investing strategy. My biggest question for LadyFIRE was if she is sitting on cash she plans to use to buy at a discount to rebalance her portfolio when the market crashes. Given that she said she would consider the market crash a sale, not that she would actually sell to rebalance, I wasn’t sure where the money to rebalance was coming from. The crash will come, as it always does in a cyclical market, but sitting on cash for too long waiting for the crash can hurt your long term returns. I am a bigger proponent of dollar cost averaging, but recognize it is mentally difficult to stay committed to investing when the market looks the way it does today.

          • Absolutely, I’m a fan of staying invested at all times. The market might still have some juice in it, and will keep paying dividends. Continuously buying and dollar cost averaging your way into the market is a great strategy.

          • I’m doing a little of both – I invest regularly, but I also keep more of a cash cushion than I really need. I’m currently trying to up that cushion so it can work as emergency fund and ready-to-go investment cash.

            So in a crash I would keep slowly pushing cash into my vanguard funds, but also take some of that cushion and push it into re-balancing

            e.g. the Trump Rally means that I now have a lower allocation of bonds than I’m aiming for, so I’m buying a little more bonds and the same amount of stocks. If the market flips theoretically the bonds will value higher, and the stocks drop, so I’ll buy more stocks

            Hope that made sense!

    • Now, when you have a cool head, is the best time to make your plans. It won’t be easy when things get crazy, but having a solid plan will put you ahead of the pack. Maintaining your planed allocation by rebalancing is a great plan to take advantage of fire sales while keeping emotions out of the loop.

  10. Thanks for sharing your experiences. I had just started work when the financial crisis hit. Stocks were up nicely in 2006 and were following suit for the first 3 quarters of 2007. I thought, this is great. The stock market just keeps going up and I’ll earn 10% every year. Then reality stepped in. Lucky for me I had received enough good advice from my dad and books I’d read to keep me from making any big moves. Plus I didn’t have much invested anyways as I’d only been working for 2 years.

    This next time around it’s going to hurt a lot more since I have much more at stake in the market. I plan to stick with dollar cost averaging into index and mutual funds, but I’m curious to see how I react to a 30% or more drop when so much more money is on the line for me.

    • Sounds like you started pretty close to the same time as me. Luckily I didn’t go too crazy, and did not have a huge portfolio at the time either. It’s great you had a solid mentor in your dad πŸ™‚

      We never stopped buying, and dollar cost averaging into the market worked great for us. I feel the same as you about the upcoming crash. I’m a bit wiser now, but also have a lot more skin in the game.

      • Definitely. I know I’ll stick it out, because I’ve seen so many people who I considered really smart pull out of the market at it’s low point during the Great Recession. They believed the doomsday stories in the media and thought this time was different and we might not recover. More really smart people I work with now have talked about how they moved their holdings to cash right before the election. It blows my mind that so many smart people make terrible investing decisions.

  11. This is exactly why investors need to go through a few cycles. It’s really hard to keep buying when the stock market is crashing. I went through the .com crash and financial crisis. The 2nd time was a lot easier for me. I just kept buying.
    Next time will be tougher, though. Our income isn’t very high anymore so we can’t invest as much. That’s why I have 20% in bond right now. When the stock market crashes, we’ll be able to convert some of that to stocks.
    Everyone needs to start investing young so they can experience the crashes and learn how to deal with them.

  12. I felt a little sick on election night when I saw what futures tanking. Actually I felt really sick. Of course, that never materialized, but I am trying to mentally prepare for when it does. We plan to stay the course, but it will be painful. We went through 2008 without pulling out – we didn’t have nearly as much at that time, so it was a little easier, but I still had to just stop watching. The recovery certainly was nice.

  13. I remember selling out of 1 fund I had as I couldnt take the pain. Everyday it was going down. It wasnt a huge amount and was a good lesson learned. Back then I wasnt as in tune to investing as I am now. I was fortunate to have a lot of cash in an online bank account and thought how lucky I was not to have lost any of it due to the market going down. However I never really invested it during the recovery either so I missed out. I did put $3000 in the Vanguard total market index on one of the lowest days but didnt start adding to it till years afterwards as I was scared. The good part was I left my IRA and 401k on automatic into my stock funds. In 2009 something clicked and I thought I should start maxing out my 401k as stocks were cheap and it seemed like a good idea long term.
    Market timing has never worked out as well for me. Probably 35% at most. Not so much in the sense of losing money directly but in the opportunity cost that I could have done better. Ive done the same thing where the market went down and I didnt buy, then I thought Id wait for the next dip to get in but it would never happen. My belief now is your best bet is to just pick some good low cost funds that you believe in, put your money in or dollar cost avg, and let time do its thing. All the hours of research and worry likely wont give you any advantage. Many active mutual and hedge funds cant consistantly beat the market and if they do by how much? Whats worked for me is over the last 20+years is setting my contributions on automatic and mostly forgetting about it and going to work. My accounts are now huge and I never made that much as a lower level IT guy.

    • Yeah, it’s tough looking back at what could have been. I’m with you on the dollar cost averaging into the market. If I didn’t do that, I would have stopped investing back in 2011 when a lot of people though the market was high. Glad I didn’t make that mistake πŸ™‚

  14. “Be greedy when others are fearful.” -The WB

    I never wish for a drop, but I’d rather see it happen before I retire than after. We all know a crash, or at least a bear market, is inevitable. I’ll take it sooner than later.

    Cheers!
    -PoF

  15. The only thing that kept me from making the same mistake back in the dark days of 2008-09 was my absolute conviction in the teachings of Benjamin Graham. I’d read the Intelligent Investor a few years prior to the collapse and, while I didn’t yet have the skill set to fully understand his work, it kept me from panicking along with the rest of Mr. Market’s herd. I would recommend anyone who is interested to read that book. If you really want to deep dive, read Security Analysis (first published in 1934). It’s not for most people, but many of the insights are timeless.

    And you’re right, another dip will happen. It’s human nature. When it happens again, I think it’s valuable to remember that when you own stocks you own fractional shares in businesses. It’s not just a piece of paper. You are not playing in casino (despite what the herd claims). Volatility and risk are two often confused, very different things. The Berkshire chairman letters are great free resources to read (IMO). You can see how Buffett and Munger approached the market panics over decades. I thought 1987, 1989 and 1993 were particularly great read….Only on a financial independence blog do I feel comfortable admitting that in public.

    • The Intelligent Investor is a great book, probably one of the better ones. If you are going to invest, it’s important to know you are buying companies that support our way of life, and not just placing bets.

      Great comment πŸ™‚

  16. Great story. Proof that investors who have been through ups and downs are simply way better prepared than us. This is also why investing earlier is exponentially better. Keep buying when the market is crashing (or don’t selling, for that matter) is hard.

    Best
    Ben

    • Nothing beats experience, but the next best thing is to be mentally prepared. Having the right game plan won’t make it any less painful going down, but it sure will help you come out on top πŸ™‚

  17. I consider any money in Vanguard untouchable, so in 2008 I shrugged. I don’t panic easily.
    I do have a friend who sold low & is now wary of stocks. I try to gently encourage him to give it another shot, but it’s not worth a long conversation.
    My sister said the me the other day that she was reading about saving for retirement & I mentioned saving in a Roth will make it less tempting that just having the money in a savings account. But I warned her we are due for a dip/crash etc in the next few years and what we will do when that happens is… nothing. Maybe buy more.
    Your Hawaii rental looks like it’s just down the beach from where we rented in Sept. Gorgeous there! I’d love to go back. πŸ™‚

    • Sweet! That was an awesome spot, we need to get back to Hawaii one of these days πŸ™‚

      Its tough giving investment advice to friends, the market could go down right after they invest. That’s why everyone should understand what they are getting into first. I have a few friends like yours and wrote the post What I Would Do With Your Money to explain to them what I would do and what the risks are. Its never a bad time to invest if you are in for the long haul, even if its at a market peak πŸ™‚

  18. As a fairly young investor who hasn’t felt the pain of a market crash first hand, this is really great post to read. Being prepared for a market drop ahead of time and being able to keep a long-term focus is hugely important. It’s a good reminder that mental fortitude is one of the best assets to have as an investor. Thanks for sharing πŸ™‚

  19. I like your honest post on this. As an older dude who has ‘lost’ in both 2000-02 and 2008-09 crashes, you won’t truly know your risk tolerance to hold unless you physically experience them. I think those who started investing after 2009 haven’t yet experienced those gut-wrenching times that truly test your ‘buy and hold’ commitment. I didn’t have the guts to buy more during those times but had the sense to stay put and stop checking accounts daily. And that alone has made a huge difference. The market taketh but giveth as well!

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