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What would be the best thing to do, if the stock market crashes? Should one invest in real estate, fonds, bonds or stocks? Or should one invest nothing at all?

Edit: Since it seemingly was not obvious what time we speak about. I mean during the crash :)

BoJack Horseman
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    Are you referring to a specific index or the entire market? There is something to be said for being specific in your language here. – JB King Feb 11 '15 at 10:06
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    I am talking about a stock market crash. I don't know how to be more specific, sorry :X – BoJack Horseman Feb 11 '15 at 10:09
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    @IbrahimApachi Nobody has been able to predict a stock market crash quite to the exact point. So that is a mirage. When it does crash small investors are way far off to make profit out of it. It is primarily the big players who make the most out of it, because they trade during it. Investing during a stock market crash isn't any different from normal times. Good things you buy some more. Bad things get rid of them. – DumbCoder Feb 11 '15 at 15:37
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    +1 for asking this question before a crash rather than during a crash. – rhaskett Feb 11 '15 at 21:18
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    The answer will be very different if you're asking about "during a crash", "after a crash" or "expected crash incoming". – o0'. Feb 12 '15 at 09:44

7 Answers7

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Remind yourself that markets recover, usually within a few years.

If you believe this and can remind yourself of this, you will be able to see the down cycles of the market as an opportunity to buy stock "on sale". No one knows the future, so many people have found investing on a regular schedule to be helpful. By putting in the same amount of money each period, you will end up buying fewer shares when the market is up, and more when it is down. As long as your time horizon is appropriate, you should be able to wait out the ups and downs.

Stocks are volatile by their very nature, so if you find that you are very concerned by this, you might want to consider whether you should adjust the amount of risk in your investments, since over time, most people lose money by trying to "time" the market. However, if your investment goals and requirements haven't changed, there likely isn't any need to change the types of assets you are investing in, as what you are choosing to invest in should depend on your personal situation.

Edit: I am assuming you want to be a long-term investor and owner, making money by owning a portion of companies' profits, and not by trading stocks and/or speculation.

JAGAnalyst
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    +1 for answering the question. The question wasn't what to do if you expect a crash but what to do if a crash happens. Most investors react to crashes as it is very hard to catch a falling knife. Slow and steady wins the race. – rhaskett Feb 11 '15 at 21:17
  • @rhaskett Actually I think the OP is in fact asking what to do if one anticipates a market crash. – dg99 Feb 11 '15 at 22:46
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    Where is your proof that most people lose trying to "time" the markets? In fact I hear offten from others who have a buy and hold strategy that they wish they got out of the market before they lost more than half of their nest egg. –  Feb 12 '15 at 07:44
  • @MarkDoony: to begin with note that "I wish I'd got out at a different time" isn't the same as "had I tried to time the market, I'd have got out at a better time". The general point is that the timing of big crashes is fundamentally unpredictable, because if they were predicted they'd happen sooner. Nobody would hold all the way to the crash. So what does some random small investor know that the rest of the market doesn't, that will let them predict crashes precisely? Probably nothing, but you'd have to closely analyse returns from different strategies to actually prove it. – Steve Jessop Feb 12 '15 at 10:42
  • ... naturally successfully timing the market makes you loads of money, so I think JAGAnalyst's claim amounts to, "most people who try to time the market fail" :-) – Steve Jessop Feb 12 '15 at 10:47
  • @MarkDoony Where is your proof that a buy and hold strategy that they wish they got out. The best contrarian example is Buffet. Everybody else didn't do their homework properly. Buffet's misses are way less than his hits. It is for no reason that his words are considered golden. And I haven't heard or seen any glowing examples of people who had/did time the markets consistently, except for some during the crash of 2008-09. – DumbCoder Feb 12 '15 at 11:13
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    @SteveJessop, timing the market is not about predicting when a crash is going to happen, it is about looking for warning signals that the current price trend may not continue and taking evasive action. For example, the price might break down below an uptrend line that has been supported for over 3 years, danger danger Will Robinson, get out of the market now. A few weeks later the price has dropped by 20%, six months later price have dropped by 50%. Did you take the warning or did you stay in the market and lose half of your capital. –  Feb 12 '15 at 11:40
  • @DumbCoder, my proof is the almost retirees to be whom I work with and others I talk to in a mentoring program I go to. I can give you some names of successful traders who consistantly time and beat the market, Louise Bedford, Chris Tate, Allan Hull, Marcus Padley and myself. Look there names up and you can learn something for once. –  Feb 12 '15 at 11:48
  • Wow, Mac or PC, Coke or Pepsi, Timing vs Buy and Hold. For those of us who espouse the Buy and Hold faith, we haven't lost anything unless we sell the investment while it's down. Buy and Hold is a strategy for long-term money. Money you plan on using within the next few years shouldn't be in long-term strategies. @MarkDooney has some good ideas for acute management of money that work well on shorter time tables. But they're not for everybody - They're for people who understand them, and can put in the effort to manage them. – Kent A. Feb 12 '15 at 13:00
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    @KentAnderson, you have lost with Buy and Hold, there is opportunity loss. Some stocks may take many years to recover. Let me give you an example, I bought QAN.AX in Jan 2000 for $3.76. If I had kept this until today (15 years later) the price is $2.56, I would have lost 32%. Plus it stopped paying dividends in 2008. Instead I sold it in Oct 2008 for $5.95 for a profit of 58%. I have since re-bought it in Oct 2014 for $1.68 and I am currently up 52%. I have made 110% over the last 15 years on this stock, instead of being down 32% if I had a buy and hold strategy in place. –  Feb 12 '15 at 13:48
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    @DumbCoder, seems like you are the troll. I don't give advice, I go to the mentoring program to learn. The soon to be retirees are people I work with in my day job who are within 5 years of retirement. You make alot of assumption when you can't read properly. –  Feb 12 '15 at 13:55
  • @MarkDoony, I appreciate the data and your perspective. I suppose I could dig up a counter example and we could toss them at each other all day ;) My buy and hold philosophy is actually working well for me (it's not a buy and hope plan, btw). I am glad you have success and are able to help people. There's plenty of room in the world for different ways of doing things and all of us to be successful on our own terms. Cheers! – Kent A. Feb 12 '15 at 13:59
  • @KentAnderson, it was supposed to be above in my previous comment that I sold it in Oct 2007 for $5.95 (not Oct 2008). –  Feb 12 '15 at 14:24
  • Hi guys this is not a discussion forum, it's Q&A. Please keep your comments on topic. – JAGAnalyst Feb 12 '15 at 14:48
  • @MarkDoony Mark I said this because it has been shown that the average investor gets a much lower return than the market as a whole. This is because of buying and selling driven behavior based on the emotional cycle, where people buy after the market has gone up and sell after the market has gone down. This is well established, but I can post some links if that is helpful. – JAGAnalyst Feb 12 '15 at 14:50
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    @JAGAnalyst, that is where you and your links fail, the average investor, whether buy and hold or buying in and selling out, all lose money. To prove the point you should look at those who use rules for their investing or trading and keep their emotions off the table. I bet if you look at these individuals then the ones that time the market will beat those who buy and hold or DCA any day of the week. –  Feb 12 '15 at 20:30
  • @MarkDoony Mark my point is that most people would do well so simply buy a market index and hold it, versus buying when they are excited about what the market is doing and selling when they are scared about what the market is doing. This is what many people do. The research on this is decades old, and again, it's not a discussion forum. Thanks for contributing your views in the form of an answer. – JAGAnalyst Feb 13 '15 at 16:11
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    @JAGAnalyst, have you seen Victor's answer to this question. Where is your proof that buy and hold or DCA is better. And I am not buying when I get excited or selling when I get scared, I buy when I see prices starting to rise and sell when my stop is reached, I leave my emotions out of it. –  Feb 13 '15 at 22:31
  • @MarkDoony Thanks Mark, I have read it and I don't generally recommend short-selling, because it requires that I know the future, as well as know that the market is mis-pricing that future information. If someone could predictably go long on the market before it goes up and short the market before it falls, they could make incredible amounts of money. It stands to reason that since very few people are able to even beat the market average by a moderate amount in a given year, that the future direction of the market is largely uncertain. I'd recommend reading "A Random Walk down Wall Street". – JAGAnalyst Feb 16 '15 at 19:28
  • @MarkDoony It's a very good explanation of market cycles. – JAGAnalyst Feb 16 '15 at 19:31
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    @JAGAnalyst, did you actually read what I said and read Victor's answer? I don't try to predict what the market is going to to, i wait for confirmation that the market has changed direction and then buy once the uptrend has commenced. I don't buy stocks when the market as a whole is falling, only when the market is rising. Ask yourself why are uptrend lines continuously supported until they are broken, and once broken why does the price keep falling. This is what timing the markets is about, not trying to predict the future but acting on what price action is currently doing. –  Feb 16 '15 at 20:14
  • @MarkDoony Hi Mark. Again, this is not a discussion site. Please participate via an answer and thanks for sharing your perspective. Again, to clarify what I've said, I don't make bets on what the market is going to do. Every market price is an equilibrium between supply and demand that is dynamic and subject to change. You are actually acting based on the belief that the market will continue to move in the same direction as it has in the very near past, and I don't believe that markets can be reliably predicted, even over short periods. If you can, great! I'm sure you'll be very rich. – JAGAnalyst Feb 17 '15 at 16:48
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    @JAGAnalyst, yes it is not a discussion site, but you always have to have the last point of discussion. It takes 2 to tango. Maybe you should read about behavioural finance and the phycology of the market. Again it is not about predicting what the market is going to do, but having a written plan for acting on what it is currently doing. Buy and hold and DCA is the gambling, because you are buying and hoping the price goes up. I treat my investing and trading like a business, not a hope that in 10 years or in 20 years the price will be higher than when I bought in, that is gambling. –  Feb 17 '15 at 20:25
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If you know the market will crash, you could opt for going short. However, if you think this is too risky, not investing at all is probably your best move. In case of crises, correlation go up and almost all assets go down.

QuantK
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  • I thought about investing in stocks in the pharmaceutical industry, because people might get ill and stressed out more often. – BoJack Horseman Feb 11 '15 at 10:30
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    If you expect the market to crash, you don't invest in anything. Everything is linked. @Quantk is right, if you xpect a crash you short sell –  Feb 11 '15 at 11:14
  • And if the crash hits its high and there is a real chaos. Some state that there might be awesome investing opportunities in that time. What do you think about that? – BoJack Horseman Feb 11 '15 at 14:28
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    Freaking out and selling everything is an option that I personally wouldn't recommend. Carefully making calculated purchases of good companies while their prices are artificially low is a great idea. It's ok if you don't buy exactly at the bottom. Getting a bargain and watching it go back up to normal values will be rewarding enough. – Kent A. Feb 11 '15 at 23:47
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    @KentAnderson, it is not about freaking out and selling everything, it is about having stop losses in the market so they take you out before a massive fall in prices starts making you freak out. Regarding getting a bargin, how do you know what price is a bargin, the price might fall another 50% from that bargin price, then take another 3 or 4 years to come back up to the levels you bought at, if it ever does. –  Feb 12 '15 at 04:34
  • @MarkDoony, stop orders are a great way to implement your pre-determined triggers. Most folks don't use them, and instead freak out, sell at the wrong times, lose money and then claim that the stock market is "gambling." On bargain hunting... I am (probably obviously) a buy-and-hold investor, so getting a good stock for 50% (or buying a fund with the NAV at 50%) is a good deal, even if it continues to go down after I buy. If it's really long-term money, multiple years don't bother me. For me to wait until it hits bottom makes me greedy, and then I make poor choices. – Kent A. Feb 12 '15 at 04:59
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First, there will always be people who think the market is about to crash. It doesn't really crash very often. When it does crash, they always say they predicted it. Well, even a blind squirrel finds a nut once in a while.

You could go short (short selling stocks), which requires a margin account that you have to qualify for (typically you can only short up to half the value of your account, in the US). And if you've maxed out your margin limits and your account continues to drop in value, you risk a margin call, which would force you to cover your shorts, which you may not be able to afford. You could invest in a fund that does the shorting for you.

You could also consider actually buying good investments while their prices are low. Since you cannot predict the start, or end, of a "crash" you should consider dollar-cost-averaging until your stocks hit a price you've pre-determined is your "trigger", then purchase larger quantities at the bargain prices. The equity markets have never failed to recover from crashes. Ever.

Kent A.
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    Regarding your second to last sentence, it depends on which equity market. 25 years later, the Nikkei is still down 50% from its peak. – 7529 Feb 11 '15 at 19:14
  • Also value averaging can be a good option. – QuantK Feb 12 '15 at 13:03
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I would also be getting out of the stock market if I noticed prices starting to fall and a crash possibly on the way. There are some good and quite simple techniques I would use to time the markets over the medium to long term. I have described some of them in the answer to this question of mine:

What are some simple techniques used for Timing the Stock Market over the long term?

You could use similar techniques in your investing. And in regards to back-testing DCA to Timing The Markets, I have done that too in my answer to the following question:

Investing in low cost index fund — does the timing matter?

Timing the Markets wins hand down.

In regards to back-testing and the concerns Kent Anderson has brought up, when I back-test a trading strategy, if that strategy is successful, I then forward test it over a year or two to confirm the results. As with back-testing you can sometimes curve fit your criteria too much. By forward testing you are confirming that the strategy is robust over different market conditions.

One strategy you can take when the market does start to fall is short selling, as mentioned by some already. I am now short selling using CFDs over the short to medium term as one of my more aggressive strategies. I have a longer term strategy where I do not short, but tighten my stop losses when the market starts to tank. Sometimes my positions will keep going up even though the market as a whole is heading down, and I can make an extra 5% to 10% on these positions before I get taken out. The rare position even continues going up during the whole downturn and when the market starts to recover. So I let the market decide when I get out and when I stay in, I leave my emotions out of it.

The best thing you can do is have a written trading plan with all your criteria for getting into the market, your criteria for getting out of the market and your position sizing and risk management incorporated in the plan.

Community
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Victor
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    the best advice on this page is your advice to have written plan with all your entry and exit criteria spelled out in specific terms. Thanks for sharing your techniques! – Kent A. Feb 12 '15 at 03:58
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Precious metals also tend to do well during times of panic. You could invest in gold miners, a gold or silver ETF or in physical bullion itself.

Jamie Bush
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  • There's a saying among the "gold bugs" (people who hoard gold) - "If you don't hold it, you don't own it". – Simon B Jan 31 '17 at 21:26
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If the market has not crashed but you know it will, sell short or buy puts. If the market has crashed, buy equities while they are cheap.

If you don't know if or when it will crash hold a diversified portfolio including stocks, bonds, real estate, and alternatives (gold, etc).

farnsy
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I suggest to just invest in index funds, these are low risk with high reward stocks that can survive even the worst of stock crashes but are still extremely profitable when the stock market is booming

mossberg
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  • There are many types of index funds; some don't involve stocks at all. For ones that do involve stocks, how can they survive "even the worst of stock crashes"? What about a stock crash that takes the value of all stocks to 0? – dg99 Feb 17 '15 at 21:50
  • They are spread out over the entire industry, you don't know what you are talking about – mossberg Feb 17 '15 at 22:05
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    @Mossberg - if you were invested in an index fund tracking the S&P500 in 2008, you would have lost about 40% (similar to the S&P500). I think it is you that doesn't know what you are talking about. – Victor Feb 18 '15 at 02:21
  • I triple mu investment in my YUM food index investment, and almost quadrupled my Pepsi index. It's cute that you are trying to prove me wrong on the Internet though, nice – mossberg Feb 18 '15 at 02:23
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    @Mossberg - Pepsi (code: PEP) is a stock not an index ! – Victor Feb 18 '15 at 04:34
  • @victor Pepsi industry is index and single – mossberg Feb 18 '15 at 04:50
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    @Mossberg - NO, PEP (being PepsiCo Inc.) is a stock, it belongs to the Beverages - Soft Drinks Industry Group and the Consumer Goods Sector on the NYSE. By the way PEP fell 40% from its highs in late 2007. – Victor Feb 18 '15 at 10:21
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    @mossberg, sounds like you don't have a clue what you're talking about. Are you in the real world or in an imaginary virtual world? –  Feb 18 '15 at 20:10
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    @dg99 if the S&P500 has a value of 0 then losing money in the stock market is the least of your worries. – David Rice Feb 18 '15 at 22:16