Updated: Jun 20
Market crashes can be terrifying. At times, it may seem like it’s the end of the world and there’s no recovering from it. Scary media headlines only compound matters.
These 5 ways will help you to thrive while others are panicking.
1) Know What You Own, and Own What You Know
Have an investment thesis. This should be the number ONE thing you do BEFORE investing into any company.
An investment thesis should include:
Your reason for buying the company
What can go wrong?
If you have not done proper research before buying, it is likely that you will end up panicking when the share price falls. Do yourself a favour by putting in the time and effort.
Having a solid investment thesis prevents you from selling perfectly good long-term investments during a market downturn.
2) Portfolio Rebalancing
A market crash is a good time to review and rebalance our investment portfolio. It is a good test of how well you understand your investments. Selling some stocks and buying into others which present better opportunities.
With a bulletproof portfolio, you’re likely to handle market crashes better.
An example of how to structure a bulletproof portfolio:
1) 15% cash - this includes liquid cash and money in the bank to cover living expenses and emergencies
2) 15% broad-based market index ETF- this can be a broad market index fund like S&P500 ETF (SPY) or Vanguard Total Stock Market ETF (VTI).
3) 30% blue chip stocks e.g. AAPL
Some criteria to look out for:
- Market cap- 50 billion and above.
- Profits and earnings for 3 consecutive years
- Assets > Liabilities
- Good management
4) 40% high growth disruptive and innovative companies e.g. TSLA, SQ
3) Have Spare Investible Cash On Hand
I'm sure many of you have heard of the term “Cash is trash”. But without cash, you will not be able to capitalise on market crashes to buy on dips. By cash, I mean investible cash (this does not include emergency funds).
Morgan Housel, author of “The Psychology of Money” came up with a plan on how to invest your spare cash.
It works the same whether you have $1,000, $10,000, $100,000, or $1,000,000. Just adjust the figures accordingly.
While there're no hard and fast rules on how much investible cash to hold, a good rule of thumb would be minimally 10 to 15%. This allows you ample ammunition to deploy your funds when the market opportunity presents itself.
4) Embrace Boring Old Index Funds
Index funds are arguably the most boring invention since sliced bread. You see people talking about that sexy growth stock. But you rarely see anyone get excited talking about investing in an index fund.
The trick is to buy an ETF that tracks the entire stock market. Sure, there are sector ETFs like technology, cybersecurity that might sound more sexy. But you won't go wrong with one that tracks the whole stock market. S&P500 ETF (SPY) and Vanguard Total Stock Market Fund (VTI) are 2 of my favourites.
This is a GUARANTEED to make money over the long run. By long run, I mean decades, not 1 month or even 1 year.
Why does this work? Due to a phenomenon that has existed since the beginning of mankind- Inflation.
Inflation causes prices of goods to increase. Companies selling those goods raise their prices, which results in greater profits. As companies generate more profits, the share prices of these companies rise in tandem. This is a cycle that repeats itself time and again (unless the company in question goes bust).
Which brings us back to why index funds work because you are buying into hundreds of companies, and not just 1 company. Even if 1 company, or even 10 companies in the index go belly up, you can still sleep well at night knowing that the others are fine.
5) Deep Breathing
This is somewhat unconventional and I’m no science expert, but deep breathing is one way to calm your nerves. During market crashes, it is easy to panic and start becoming fearful. Practising deep breathing can calm our nerves and help us navigate through the market volatility.
Breathing is the easiest and most instrumental part of the autonomic nervous system to control and navigate. The way you breathe strongly affects the chemical and physiological activities in your body.
Invented by a guy named Wim Hof, the Wim Hof Method is a breathing technique that is premised on inhaling deeply and exhaling without any use of force. Throughout the years, Wim Hof has developed special breathing exertions that keep his body in optimal condition and in complete control even in the most extreme conditions.
If you want to give it a try, check out the guided breathing exercise here!
Join Our BOS Community
In the Buffett Online School, we believe in learning the right investing mindset and system, so we can start cultivating emotional detachment and grow our wealth safely and substantially in the long run.
By joining the Buffett Online School community, you and your friends will have access to a wealth of educational resources, expert insights, and a vibrant network of learners. This will help you and your loved ones further enhance your investment skills and emotional stability, thereby improving your portfolio returns.
Our next 2-day BOS MBA Value Investing Online Bootcamp is happening soon! We will teach you how to use Warren Buffett's proven investing method to maximize your portfolio in a safe way.
Even if you have attended before, you will still gain additional new insights and exclusive community support specifically for this upcoming bootcamp!
And the best part is, it is FREE!
Additionally, our BOS community offers exclusive rewards and recognition for each person you invite, making your journey with us even more rewarding. You will take away resources like:
- Gone Fishing With Buffett ebook to understand Buffett’s investing insights (worth $17)
- Financial Freedom Calculator to plan out your own retirement portfolio (worth $47)
- Warren Buffett’s Portfolio Watchlist to peek into his recent trades (worth $97)
- ETF online course to learn to generate consistent 10% every year (worth $297)
Remember, you have the choice to cultivate the right investing mindset and unlock your potential to build wealth through intelligent investing. Together, we can create a network of educated investors who make informed decisions and contribute to their financial well-being! Join the BOS Community Today!