People who understand how the market works know that a market crash is normal and to be expected.
But when the market actually does crash, they don’t necessarily act in ways that suggest that they have been expecting it to come.
Some panic and exit the market, some capitalise on the opportunity and dive into the market, and others simply watch from the sidelines doing nothing.
Depending on what you do during a market crash, you can lose a lot of money or make a lot of money.
However, what you do during a market crash isn’t the only thing that’s important – what you do before and after it is just as important.
In this post, that’s what I’m going to talk about – what you should do before, during, and after a market crash to make the most out of it.
Disclaimer: This post assumes that all investments you have are sound investments like diversified ETFs or strong and stable companies, and there is no fundamental deterioration in the businesses/companies.
During The Crash
I’m starting with this because it will then be easier to understand why the “before” phase is so important later on.
1. Protect Filled Washtubs
As in, protect your existing investments (you’ll see why I say “washtubs” later).
If you’re already invested in the market during a market crash, the most important thing you should do is to hold onto them.
In other words, don’t sell them off.
Chances are that your equity positions have taken a nosedive and you may be feeling anxious.
But the truth is that any losses you are experiencing are merely paper losses – you have not realised them into cash, and so you haven’t actually lost any money.
By holding onto your investments, you are giving them time to recover (which they should) and in a few years’ time, instead of suffering a loss, you’d be earning a profit.
2. Fill Up The Washtubs
By this, I mean investing more than you normally would.
As Warren Buffet mentioned in his 2016 letter to Berkshire Hathaway shareholders,
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
So if you DCA regularly, increase the amount you set aside to DCA. Or if you invest a lump sum every few months, make a larger lump sum investment during the market crash.
This may seem counter-intuitive initially because the market is on a decline, yet I am saying that you should be pouring more money in.
But the logic is simple – the cheaper the price you’re able to buy into your investments, the higher your potential returns will be.
A market crash presents an opportunity to buy into markets and companies at discounts.
And just as how you would buy necessities in bulk whenever they are selling at a discount, you should do the same for your investments.
Before The Crash
1. Fill Up Teaspoons
The first thing you should do before a market crash is simply to continue investing regularly, but not as aggressively as you would during a market crash.
This is because no one can predict when the crash will happen.
If you choose not to invest and leave your money idling around, you will be missing out on any potential returns between now and the market crash.
So, continue to collect gold – but with teaspoons instead of washtubs.
2. Build New Washtubs
You want to be able to collect as much as you can when it rains gold during a market crash.
But in order to do that, you need to have new washtubs on hand, waiting to be filled up.
That is, to maximise your buying power during a market crash and thus long-term returns, you need to have cash in the bank, ready to be dumped into the market.
While it may be tempting to invest all the money you can afford ASAP, doing so will prevent you from being capable of capitalising on a market crash.
This means that aside from your emergency fund, spending fund, and savings, you should also be accumulating an opportunity fund – a sum of cash that you can afford to invest in the market when a golden opportunity arises.
3. Label New Washtubs
Simply having new washtubs ready to collect gold isn’t enough. You need to know what you want to fill them up with.
You have limited capital and you can’t invest in everything you want to at once – you need a gameplan.
With all the noise and price fluctuations, it’s easy to get distracted from what you really want to invest in during a market crash.
You should have a general sense of:
- what to buy (the exact stock/ETF/etc)
- how much to buy (dollar amount/number of shares)
- at what price to buy (based on your valuation, more for stocks)
Whether you’re thinking of strengthening an existing position or adding a new investment to your portfolio, having a gameplan will provide direction and guidance that will keep you on track in the midst of the chaos that is a market crash.
By doing all of this homework before a market crash, you will be well-equipped to act quickly and take advantage of any discounts.
After The Crash
1. Fill Up Teaspoons
This is for the exact same reason as before the crash.
2. Inspect Your Washtubs
Hopefully, you were able to collect as much gold as possible during the market crash.
If you did, there’s a good chance that some of your washtubs are now overflowing, while others are not as full as you’d like.
In other words, the allocation of your portfolio would have changed, and you should re-evaluate it to see whether or not it’s in line with your goals and risk appetite and adjust your portfolio accordingly.
My Experience: March 2020 Crash
Being a student who was invested in the market through the March 2020 market crash, I’m proud to say that I made it through unscathed – and my portfolio is now up higher than it was 1 year ago.
But I’m sad to say that that’s about all I’m proud of.
I was thoroughly unprepared to take advantage of the market crash last year – I had very little investing money left, I didn’t know what I wanted to buy, and at what price to buy.
80% of the money I had set aside for investing was already in the market, and I only had my emergency fund + spending fund + long-term savings left.
While there were several investments that I considered, it took me some time to decide what to buy because I had so little capital left.
Back then, I didn’t think I was short on time – because historically, markets took months to bounce back from a crash, so I figured prices would only continue to drop.
But as we all know, it was merely a matter of weeks before the market recovered to pre-crash prices – by the time I made my investments, the discount I enjoyed wasn’t as much as it could’ve been.
My Takeaways
Looking back, it definitely feels bad that I wasn’t able to capitalise on such a golden opportunity even though I was fully aware of it.
And it didn’t help that I had put in ~50% of my investing money in the 3 months leading up to the March 2020 crash.
But I don’t regret having done so.
On the flip side, I’m thankful that I experienced this as a student when I don’t have much capital for investing anyway.
I have learned exactly what position I don’t want to be in during the next market crash and all the market crashes to come in my lifetime.
I can also take the necessary actions to ensure that I will be able to take as much advantage of a market crash as possible in the future like building up a stash of washtubs.
So I might have missed out on this one, but you can bet that I’ll be well prepared for the next one.
To summarise,
Here’s what you should do before, during, and after a market crash to take full advantage of it to build wealth.
Again, note that this post assumes that your investments are sound such as diversified ETFs and/or solid companies that have not fundamentally worsened.
If you’re unsure of whether the stocks you’re investing in will be able to survive the market crash, I’d recommend just investing in ETFs.
What was your investing experience during the March 2020 crash like? Was there anything you wish you did differently/better?
Let me know in the comments below!