3 Mistakes to Avoid if the Stock Market Crashes

If you’re an investor worried that another downturn could rock the markets before the year is out, you’re certainly not alone. Investors have been met with no shortage of bold and eye-catching predictions from Wall Street for months on end that another crash could be just around the corner.

Whether or not the harbingers of doom are right isn’t really the point here. Market downturns come and go. What matters is not an investor’s ability to accurately predict a market crash — and many have tried and failed to do so — but to respond correctly when they do appear.

These are three potentially portfolio-crushing mistakes you should never make if and when the stock market crashes again.

1. Don’t scrap your long-term investing strategy

A long-term buy-and-hold investing strategy doesn’t become obsolete just because the market experiences a short-term downward spiral. In fact, sticking to this tried-and-true strategy of consistently investing in a variety of quality companies across multiple industries and holding onto them through the ups and downs in the market becomes more important than ever during these volatile moments. 

In any market environment, habitual and consistent investing is the retail investor’s advantage. If you attempt to time the market or guess what it will do next as a means of determining your investment decisions during a downturn, you will likely be sorely disappointed with the results.

Does this mean you should hold onto fundamentally bad or weak businesses? No. By the same token, just because a stock sees its share price fall over a period of weeks, months, or even longer, that doesn’t make it a bad investment by default. 

When you thoroughly research and understand companies that you invest in, and that investment thesis is supported by a robust underlying business, exciting leadership, and compelling financials, a temporary downturn in the markets alone shouldn’t break that strategy.

2. Don’t rush to pull all your money out of stocks

It’s a common knee-jerk response to want to hit the “sell” button over and over again when you see shares of companies you own plummet during a downturn. There’s no denying that seeing the value of your portfolio decline steadily over a period of time is one of the worst possible feelings for an investor.

Not all stocks or portfolios respond to downturns in the same way. The composition of your portfolio will depend on your personal risk tolerance and investment preferences, but a balanced approach to diversification can help minimize the impact of a crash on your holdings. 

For example, if you’re an investor that has bought heavily into historically high-growth stocks like Amazon, Etsy, or Shopify, your portfolio has likely been struck with far more volatility in the choppy market of the past year than someone who tends toward slower-growth, value-oriented stocks or blue chip stocks. 

That’s not to say you should never sell a stock you own or that growth investing is a thing of the past. Here’s the bottom line: If your decision to sell a stock is tied solely to interim price movements, think long and hard before you turn intraday portfolio shifts into permanent, realized losses.

3. Don’t let short-term market noise dictate decisions about your investment portfolio 

As long-term investors, the benefit we gain from staying faithfully invested in the market through its peaks and valleys is to experience its best days and most robust cycles of growth. The converse of that is investors who stay in the market through all its seasons will inevitably experience periods of downturn that temporarily impact their portfolios.

Even when a downturn lasts over many months, when you’re invested in companies for five, 10, 15, or even 20 years, that is still a relatively short cycle in your overall investing experience. 

Not all market crashes are created equal. Some resolve in a matter of weeks or months. In some past downturns, it has taken a few years before the market has recovered again. However, there has never been a single crash, not one, from which the stock market has not eventually recovered and rebounded.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rachel Warren has positions in Amazon, Etsy, and Shopify. The Motley Fool has positions in and recommends Amazon, Etsy, and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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