I have some friends that were in a fraternity in college. During their initiation period, they were locked into the shared frat shower and forced to listen to “Who Let the Dogs Out” by the Baha Men on repeat for 48 hours straight. I can’t make this shit up, ladies. Men are fucking awful. Can you imagine the paranoia that 48 hours of Baha Men would unleash? The feelings of helplessness? The pure panic that each new minute brings?

The questioning every single life decision you’ve ever made to get you to the point you’re at now??

Well, bad news: A 48-hour long Baha Men extravaganza is precisely what the next stock market crash is going to feel like. Only longer. And more personal. And we can’t do anything to stop it from happening. 

A bear market, which is the stock market dipping 20% or more, happens about once every decade or so. There’s no telling when the next bear market will be; our last one was in 2008. (FYI, 2008 was particularly upsetting. The stock market was down about 50% across the board. Yowzers! For about a year, it was the investor’s equivalent of “All About That Bass” by Meghan Trainer on loop.) The next crash could kick off tomorrow. It could be in another ten years. No one knows when it will happen, we only know that it will.

Maybe you just got started saving and investing, or maybe you’re a seasoned vet with $100K in the bank. No matter the amount, if you’re a young person you’ve probably got at least a part of that money invested in the stock market. And to be clear, if you’re invested in stock funds, you’re invested in the stock market.

For a minute, let’s pretend it’s the beginning of 2008: You’re settling into your couch, in your As Seen On TV snuggie, to watch the Sex and the City movie/Juno/Kung Fu Panda DVD that Netflix just mailed (!!!) to you. Stocks start to lose value—and fast. By the beginning of 2009, the crash has cleaved stock values IN HALF. If you had $10,000 invested in the stock market within your 401(k), now you’ve got less than $5,000.

Handy table of how terrible stock market dips can feel:

In this moment, what would you do?

If you said, “scream, sell my stocks, take the cash, move to rural North Dakota, build a mud hut and arm myself with a musket, live off only squirrel meat and edible roots,” I can’t exactly blame you. But this, in fact, a bad plan. Don’t do this. I’d miss you too much.

If you said, “I would do nothing,” DING DING DING!! You’re the winner! Someone get this girl a hot dog and a vodka!

The worst thing that you could ever do during a stock market downturn is actively sell out of your stocks.

‘Cause the stock market, like the economy, moves in cycles. Not every year is an “up” year. It can’t be! That’s just not the way the world works. The market has a life much like a human life—there’s bound to be some weird years in there. But here’s what’s important for you to understand: The stock market has never not come back up!

Let’s explore what it would have looked like to remain calm throughout the stock market crash of ’08 and ’09.  While I worked in investment management, I had plenty of clients with $5 million (or more) in the stock market. What would have happened if they sold out when shit got real scary, as so many of the clients I worked with did?

If they succumbed to their fears, she would have locked in losses of over $2.5 million. At this point, they may have hoarded cash, waiting on the sidelines for “things to get better.” But guess what? While they’re waiting, the stock market begins to creep back up! And you cannot miss the good times!! That’s a surefire way to ensure you earn less than the market’s long-term average. From the stock market’s nadir to where we’re at now, the market’s up 280%.

So, how much is our hypothetical investor worth now?

By simply being along for the journey, they now have over $8 million in the bank.

What happens to your brain during a stock market crash

It’s very easy to brush off what I’m saying. You’re cool! You’re smart! You ain’t no reactionary butthead! (Women are notoriously better at staying the course than men.) But sometimes, an event like a stock market crash gets the better of even the level-headed. For one, a stock market crash is completely out of our control, which is totally scary.

When you see your money “disappearing,” it is very possible you’ll snap into full SOS mode, whether you want to or not. You see, we humans are equipped with these beautiful cavelady brains that were designed to keep us alive for many thousands of years, but these same brains are sometimes mismatched with the task of navigating the manufactured chaos of our wacky, modern world.

When faced with danger, humans are hard-wired and chemically-driven to do something about it. To take action! To battle to the death whomever wishes ill upon our kin!!! Or my personal favorite, to run far, far away!!! That’s called the “fight or flight” mechanism. And thank fucking god for it, amiright? Our instincts are generally great for staying alive— but terrible for investing: “Doing something” with stocks means selling them, often at a huge loss.

You might STILL be thinking, “No way, Dumpster D! I would never do something so stupid!!” But it’s tricky because even if YOU keep YOUR cool, you’ll have family members and friends who will NOT be keeping their cool. And this will make you question your cool. Humans are also total herd animals. If everyone else is freaking out, you may too.

Here’s what you need to do during a crash

Nothing.

No, but seriously, do nothing. Keep adding money into the market as you are now.

If you feel completely secure in your job and have enough cash to get you through a possible recession, you can try to increase the amount you put into the stock market. Buy that shiznit on sale! I don’t advocate trying to time the stock market (because basically no one in the history of time has done it successfully), but we shouldn’t ignore the oldest and wisest of investing adages from O.G. investor, Warren Buffet: “Be fearful when others are greedy, and greedy when others are fearful.” Seems simple enough, but this is HARD for people to put into practice. Because as I mentioned, that means standing in opposition to popular opinion whilst every fiber of your being is screaming “Mambo No. 5” on repeat.

Allow me to quickly clear something up: The above might sound slightly different from my recent advice about the next economic downturn. To be clear, I wrote this post as a follow-up to We Need to Get Serious About the Next Economic Downturn. In this piece, some thought I was recommending you hole up and stop investing. Nope!

When we talk about the economy and the stock market, we are technically dealing with two different beasts, though these beasts totally hold hands and boink on the reg. But in general, with the economy, we are talking about your job. With the stock market, we are talking about just that—your investments in the stock market. In summary: be over-prepared to lose your job; pay as little attention to your investments as possible. 

No one in the world knows when the next big crash will be. But whenever it does happen, here’s a list of reminders you can read over and over and over when you get the urge to start looking for a plot of land for your mud hut.

1. Repeat after me: “I do not need the money right now.” Repeat it again. Understand that volatility—also known by another name, risk—is the short-term price you pay for having a chance at higher returns over time.

If you need this money in the next five years, it should not be in the stock market. You’re in it for the long haul, sister, and the stock market takes a long-ass time to work its magic. Like, twenty years minimum but forty or fifty years is better.

2. Stock market volatility is normal NO MATTER WHAT CAUSES THAT VOLATILITY. It reveals and shakes out inefficiencies. Ups and downs are a part of stock investing and if you can’t accept this deep into your heart, you really shouldn’t invest in the stock market.

3. When the stock market dips, it is because investors are selling out of their stocks. We, the investors, literally cause market dips. Y’ALL, THE CALL IS COMING FROM INSIDE THE HOUSE. Stocks are subject to the forces of supply and demand just as they set prices for crunchy peanut butter and Teslas and everything else in the world (that’s free from government control). If investors are selling out of their stocks, that’s what causes the prices of stocks to fall—it’s not necessarily because the companies you own are broken. (See #4)

And people sell stocks for a number of reasons, not all of them rational. Of course not! Humans aren’t always rational. Mood swings are a natural part of being human; think of volatility as a giant reflection of that. Volatility: The Stock Market’s Mood Ring.

4. Remember what you own. When you own a stock, you own a percentage stake in that company. During spats of volatility, there’s nothing broken about these companies that you own; you still own the same % of that company. Do you really think Coca-Cola is actually going to sell less sugar-tar or that Target is going to sell less mint polka-dotted home decor ten, twenty, or thirty years from now? Hell nah. You know those bastards are gonna continue to make more money over time, for better or worse. The stock market will reflect this.

5. If you’re hearing people say that this stock market crash “is different,” or “more severe” or that the “system is more fucked up” or that the “system is broken” or my personal favorite, that “stocks are going to zero,” IGNORE THESE DINGBATS. These are the same exact things that are said during EVERY stock market selloff. Every. Single. Time. People love to be doomsayers, but doomsayers have been wrong 100% of the time so far. (Okay I admit I’m kind of a doomsayer but if the entire system collapses, fiat currency/cash won’t be saved either. And gold, a weak and pathetic metal with little practical value, will be completely useless during the zombie apocalypse.)

6. Remember that the news is not your friend. The function of the news is NOT to keep you well-informed and calm. News media feeds into the panic because if you’re panicked, you’ll consume more news. The news’ primary function is to sell you to their advertisers. And doom sells.

7. The stock market always comes back up! People can’t be cranky forever, and this is coming from the crankiest person you know. When the world doesn’t fall apart as expected, people will start to be interested in the screamin’ deals presented by the stock market’s freshly lower values. They’ll buy in with all the cash they’ve been hoarding, and this causes the stock market will move higher. Happens every time. 

Okay, babe! You’re ready for it now. Do as you always do; remain cool and stand your ground. See opportunity where others see disaster. You got this!

 

4 Comments

  1. the Budget Epicurean on November 15, 2017 at 12:14 pm

    Marvelously written with just the right dose of humor and brashness. I think I may love you. Bring on the sales!



  2. Fredrika on November 22, 2017 at 2:12 pm

    Really interesting read! Currently setting of on a FIRE journey myself in one of the most heavily taxed countries in the world, the viking land of Sweden.
    Here it is one of those crazy places where it for example is actually a good investment strategy to keep your student debt for as long as possible (just wrote a post about it on http://www.fireviking.com). Interesting to hear what your take on the different effects in different countries may be in the case of a new market recession.
    Cheers,
    Freddie



  3. Alias seo on November 27, 2017 at 7:33 pm

    That’s a good point that you can have your money make money. If you have savings it has the potential to be an investment instead. If you don’t do anything your money will lose value anyways because of inflation.



  4. Frogdancer on January 18, 2018 at 1:04 pm

    Great post. I particularly liked the Buffy reference. Can’t go wrong with that- if she wasn’t so distracted by trying to save the world all the time she would’ve been a huge FI fighter!