3 things this Fool will do in a stock market crash!

I see a stock market crash as a severe storm. They are not expected, relatively rare, but also inevitable. Dealing with market crises that are sometimes just the price of admission to invest.

But I find that being prepared helps a lot, because accidents can happen at any time and quickly. After all, there is a reason why investors say that the market takes the stairs up and the elevator down!

I don’t know if the fallout from the collapse of Silicon Valley Bank will lead to disaster. But here are three things I must do to prepare for the inevitable – anytime.

#1: Know why

Each bubble and subsequent crash has its own dynamic. The Dutch ‘tulip mania’ between 1636 and 1637 (when contract prices for newly released tulip bulbs reached ridiculous levels) was obviously very different from the US dotcom crash around the turn of the Millennium.

In addition, the Global Financial Crisis from 2007 to 2009 is clearly different from the Covid-19 pandemic of 2020. Both caused market crashes, although the former was prolonged and the latter relatively short.

It is important to know what caused the accident. But more importantly I remember that the stock market has recovered from every collapse in history.

#2: Stay invested

In 2008, the FTSE 100 tanked badly. Then it went up 22% in the following year.

Ultimately no one knows when the market will reverse, so it pays (literally) to invest.

According to data from Bloomberg, people who invested in Footsie during the 10-year period between 1986 and 2019 had an 89% chance of making money. Interestingly, that period includes the 1987 Black Monday crash, the dotcom bubble, and the Global Financial Crisis.

Conversely, one study found that between 1926 and 1990, an investor who missed the top 7% of the US market in a performing month would get ZERO returns over those 64 years!

Of course, the results seem to backfire. No one knows what the future holds. But they highlight how much simpler the buy-and-hold approach is than trying to time the market.

#3: Why do I own this stock?

When the market crashes, it is important that I understand why I own the stock.

If the only reason I hold it is because I think it can make me rich overnight, then I will be more inclined to sell if it plummets by 90%. And probably at a far lower price than I paid.

However, it is a totally different story if I know that the shares I have represent a small part of the real business I am very familiar with.

For example, I own a stock of a taser manufacturer Axon Company for many years now. It has grown into one of the top holdings.

When the pandemic hit, Axon’s stock fell 30% in a month. But for me this is not a business that suddenly costs 30% less. So I added to hold, even though there is every chance it is more to fall.

The reason I do it is because I know the business and whether I have stock. If that’s the case, the best thing to do during an accident is to stay calm and take advantage.