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How to Survive A Stock Market Crash


How to Survive A Stock Market CrashIt has been a scary few weeks for investors. The US stock market crashed as the COVID-19 outbreak spread around the world. We finally figured out the US isn’t going to escape unscathed this time. Now, schools are shuttered, businesses are closed, sports season canceled, and many people are hiding out at home. The US economy is grinding to a halt. Businesses will lose a lot of money until this pandemic is under control. Regular people will suffer too. Many US households don’t have enough savings to get through this. The government is going to help, but I think it will get very ugly for many families. Even well off households will be hit hard. Retail investors already lost a large chunk of their portfolio. Unfortunately, it’s not over yet. The global stock markets will crash more in the weeks to come. It will be painful for everybody except for Clorox and 3M employees.

The US stock market has been on a great run for 11 years. Lots of people never went through a crash like this and many of us forgot how to deal with it. That’s why we all need a refresher on how to survive a stock market crash.

Recession is coming

The 2020 coronavirus crash is the worst kind of news. It signals that a recession is coming. Corporations are losing a lot of money from social distancing and there will be layoffs very soon. Also, US businesses have a record amount of debt, 10 trillion dollars. What happens if you have a ton of debt and no customers? Easy, many companies will go out of business. Don’t be surprise if you see lots of bankruptcies over the next few months. That’s why it’s time to plan right now. What will you do if you get laid off?

Cash is king in a recession. An emergency fund is more important than ever. You should have enough money to pay at least 3 months of bare-bone living expenses. This is the top priority. The problem with a recession is it’s hard to find a new job. There will be a lot of unemployed people looking for a dwindling number of jobs. It won’t be easy if you get the pink slip.

Recession plan

  • Track your expenses and figure out a bare-bone budget. One common mistake people make is to continue spending like nothing is wrong. Don’t do this. If you get laid off, cut back severely and spend as little as possible.
  • Save up at least 3 months of bare bone living expenses. We spend about $4,000/month on average, but we can cut down to $2,500 if we have to. So we need at least $7,500 in cash (saving account) in case our income disappears. You need to do something like this. More cash is better when a recession is looming.
  • Read up on unemployment benefits, every state is different. They’ll help a lot. The government probably will step in and extend the unemployment benefits if the recession is severe. Gig workers and self-employed people are probably out of luck.
  • Net work with your old friends and coworkers now. They could be a lifeline to a new job.
  • Figure out health care if you get laid off. This is even more important with the COVID-19 pandemic. If you don’t have health insurance and get sick, it will destroy your finance. The government said they’ll help, but I don’t really trust them to get it right. It’s better to have health insurance. I think COBRA is a good option for a few months. It’s very expensive, though.
  • Get rid of credit card debt if possible. Hopefully, you don’t have much debt. If you can pay them off, then do it while you still have a job. Once your income dries up, I’m not sure what you should do. Other bills will be higher priority than paying off debt at that point. You might have to just pay the minimum (or default) if you have credit card debt and no income. Your credit score will be screwed up, big time.

Investing when the stock market crashes

Now, let’s talk about investing. It’s been 11 years since the last stock market crash. Many investors haven’t been through this kind of drop. It’s scary to see your retirement fund and investment portfolio decrease in value. Even seasoned investors get nervous with a hard & fast stock market crash like this one.

During the 2008 global financial crisis, our net worth dropped 30%. That’s a huge percentage, but that was a slower drop. About $250,000 disappeared from our investment accounts. However, we had a great income. I was an engineer and my job was pretty secure. My wife’s job was even more secure. So we didn’t worry about getting laid off. We saved aggressively and kept buying stocks during the downturn. It paid off and our net worth increased significantly over the last decade.

This time, I’m more conservative because I don’t have a steady paycheck anymore. My blog income probably will drop significantly when a recession hits. Fortunately, Mrs. RB40’s job is very secure. She won’t get laid off unless things get a lot worse. Even that might not be too bad. They’d probably offer her an early retirement option since she’s been there for a long time. Actually, that would work out very well for us. Anyway, our income is smaller now and our portfolio is much bigger. That’s why I diversified our portfolio a bit over the last few years to become more conservative.

From February 19th to March 12th, the S&P 500 index lost about 27% of its value. That’s bad. During the same period, our net worth dropped about 14%. That’s better than the stock market, but it’s still really scary when I look at the dollar value. In less than a month, we lost over $400,000. Our portfolio is much bigger now than in 2008. Even a smaller percentage drop means a lot more dollars lost. If we had 100% in equities (stocks), we’d be down even more.

Stock market crash strategy

Your strategy will have to change as you age. In 2009, we had 100% invested in the stock market and we kept buying when the market crashed. That same strategy isn’t a good fit for us anymore. Now, we’re more diversified and I’m timing the market a bit. You need to come up with your own strategy, but here is my plan.

Cash is king

If you will need money in the next few years, don’t put it in the stock market. For example, we will need a large sum when our son goes to college in 2030. When he’s in high school, we’ll be a lot more conservative with his college savings and move most of it into bonds. Fortunately, he still has 10 years left. For now, all his college savings are 100% stocks.

Young investors (20 to 40 years old)

For people under 40, you shouldn’t worry about this stock market crash at all. Just focus on saving as much as you can and keep investing. This is a great time to average down. The stock market will recover by the time you need the money. Just ignore the news and keep buying.

At this age, focus on improving your skill set and increasing your income. You need higher income to increase your investment.

For now, don’t worry about how your portfolio is doing. No matter how much money you lose, it will look like small change when you’re 60. I’m assuming most young people portfolio is relatively small. I’d recommend 100% stocks if you’re young. This is the chance to learn how to ignore the volatility. This won’t be the last time the stock market crash.

Middle age investors (40 to 55 years old)

This is a tricky age range. Some people are still struggling financially, but many are doing quite well. If you’re struggling, you probably need some help. Educate yourself about investing or find a good financial advisor you can trust.

On the other hand, some investors are doing very well at this age. Luckily, we’re part of this group. Our portfolio is larger now so we don’t invest 100% in the stock market anymore. Now, we have rentals, real estate crowdfunding investment, REITs, international stocks, and intellectual properties.  When the stock market crash, our net worth doesn’t drop as much because we have some alternative investments.

Our strategy also changed. In our brokerage accounts, I usually hold 70% stocks, 20% bonds/cash, and 10% alternatives. When the stock market crashed, I started going back into stock in tranches. Here is my personal guideline. (I don’t follow this religiously. It’s just a guideline.)

  • S&P 500 index new high – 70% stocks, 20% bonds/cash, and 10% alternatives
  • S&P 500 index dropped 10% – 70/20/10. Stay the course.
  • S&P 500 index dropped 15% – 75/15/10. Start buying.
  • S&P 500 index dropped 20% – 80/10/10. Buy more. <<< 3/15/2020
  • S&P 500 index dropped 25% – 85/5/10. Keep buying
  • S&P 500 index dropped 30% – 90/0/10. Getting nervous, but keep buying.
  • S&P 500 index dropped 35% – 95/0/5. All in!
  • S&P 500 index dropped 40% – 100/0/0 stocks. Really all in… (I don’t count the stuff I can’t liquidate here. For example, we still have our rentals.)

I don’t think it will get down below 40%, but you never know. At that point, there will be plenty of quality stocks on sale. This is my strategy. We don’t plan to withdraw from our portfolio for 10+ years. That should be enough time for the stock market to recover.

For you, I’m not sure if this is the right strategy. If your income isn’t secure and you might need to sell some stocks, then you will have to be more conservative. If you can’t stomach the volatility, then you will need to be more conservative as well.

A better strategy for most investors is to find an asset allocation you can live with and just rebalance occasionally. That’s easier and more methodical. Anyway, figure out a strategy because you’re going to need it.

Investors near retirement (55 to 70)

At this age, you really need to be much more conservative. The sequence of returns risk is very high when you’re near retirement. Basically, if you retire in 2020, your portfolio will be depleted much quicker than in 2012. Try to put off retirement until the stock market recovers if you can. Investors in this age range should have more allocation in bond and cash.

Many early retirees I know have at least 1 year of living expense in cash and 3 years in bonds. This will enable them to ride through most bear markets and avoid selling stocks when the price is down. We’ll probably do this when we’re 55.

  • Cash – 1 year of living expense
  • Bond – 3 to 5 years of living expense
  • The rest? You’ll have to find an asset allocation you can stick with. I’ll probably keep the same 70/20/10 allocation for the rest of our portfolio.

Retired (70+)

At this age, you’re dependent on your portfolio. You will need to be even more conservative. I haven’t figured this part out yet. It’s too far away for us. We’ll probably go down to 50/50 or something like that. At that point, it’s all about wealth preservation.

The stock market will crash even more

It’s not looking good as I’m writing this post. The Fed cut interest rate to almost 0% and started QE4, but the stock market futures crashed. It’ll be another bloody Monday on Wall Street, most likely. This is why you need a plan. If you don’t have a plan, you will feel lost and panic will set in. Investors will dump stocks. The recession is going to kill profits this year so people are really scared now. Regular people can see life is going to be tough because so many places are shut down.  However, if you are a long term investor (10+ years before you need the money), this is the time to buy (in tranches.) It will pay off when the stock market recovers.

Do you have a plan for the next few months? The stock market will get worse before it improves so brace yourself for more pain to come. Stay safe and do your part to help control the COVID-19 pandemic. Please keep away from other people and wash your hands often.

Sign up with CrowdStreet for free to see the projects on their marketplace. There are many impressive office buildings and apartment complexes on offer right now. Real estate is a great way to diversify your investment.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
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{ 33 comments… add one }
  • collage student March 20, 2020, 7:39 am

    Hello, Joe! I enjoyed a post a lot!
    As for me, it is just a beginning. Who knows how long it will last, maybe 3 months, maybe a year. Good thing is to work remotely. Sooner or later we will all at home. Anyway, we have to plan our expenses and to careful while using credit cards. Students like to spend money without expense controlling. The first thing you need to remember is that the extra money that you get on a credit card is not given to you for free. In addition to the fact that you have to return all the used credit money in a few weeks or earlier, you will have to pay the interest rate to the lender even higher. Therefore, you should not thoughtlessly spend an affordable credit, and use it only if necessary. Plan your expenses, it is a great way to control your financial future.
    Thank you again for such a useful article!

  • GYM March 18, 2020, 11:25 pm

    Ouch, $400K paper losses. Mine is about $70K right now. Painful!

    I have cash sitting on the sidelines though and am deploying it in tranches. Trying to limit myself to not buy anything more than once a week, since it keeps going lower, and lower, and lower.

    Great tips on how to survive this pending recession and invest depending on your age category.

  • mary w March 18, 2020, 10:02 am

    I certainly agree that if one is sitting on a load of cash one should come up with a strategy for getting more in the market. But…if the stock market goes down 15% you need to add almost 15% to your stock allocation just to keep your overall asset allocation the same. Another 5% on top of that might be too much for many.
    Changing you AA % will also cost taxes unless it can be done completely/mostly within tax sheltered accounts. Selling bond funds could generate capital gains. Then when you sell stock after they’ve appreciated to get back to basic 70% stock allocation more capital gains will be owed.
    My situation is likely different than most of your readers since I’ve been retired more than 10 years and no longer am young. My biggest tax worry is the RMD tsunami I’m facing in a few years. So with the downturn I’m accelerating Roth conversions that I would have otherwise done throughout this year. Then I’ll likely make more conversions than planned and surge into the next tax bracket.

    • retirebyforty March 20, 2020, 7:35 am

      That’s why it’s good to have some bonds. You can sell bonds and buy stock to rebalance. Hopefully, you can do most of this in a tax-sheltered account.
      RMD is a big issue for older folks. Good luck.

  • Ride the Dollar March 18, 2020, 7:17 am

    I’m new to your site and appreciated this review of the key things to consider in the present situation. I also found the reader comments useful: A takeaway fore me is that even though things are dire, there may be new opportunities that arise to hustle and make some cash, i.e., new “needs” that are created when so many people are hunkered down at home. Today, I’ll be counting my cash and ruminating on the possibilities…

  • Lilith March 17, 2020, 9:37 pm

    We sold our rental in 2018 and had 300k to invest elsewhere. I put 150k in various vanguard funds, 60k in 2yr cd and 90k in 3yr cd. I was wondering what I was going to do when the 60k matures this July and was hoping for a market correction. So now I got my wish but it’s definitely a lot scarier a circumstance than I’d like to have.
    So far I’m dollar cost averaging my loose cash into index funds until my cds mature.
    I feel blessed that we are fortunate to be in this circumstance unlike so many other people that will suffer from all the shutdowns. So I’m planning on allocating some funds to give. I hope we all keep others in mind as well.

  • Helen March 17, 2020, 4:59 pm

    Hi Joe, great topic, and very good points. The falling stock market affects every investor. I learnt my lesson during the 2008 financial crisis. This week I decided to contribute to the Roth IRA for 2019, and did some Roth IRA conversion.

    Hate to see the market going down, but I don’t worry about it too much. I have a part time job that is pretty safe, and get a nice cushion to go through this cycle. You take care.

  • Xrayvsn March 17, 2020, 4:36 am

    It was purely luck for me but 2019 was the year I decided to de risk my portfolio because I was approaching my retirment window. In hindsight that move probably saved me $500k or more as I took a lot of equities off the plate.

    Even so I still lost a lot of money so far just because of the sharp drop and the amount of money still in play.

    I consider my job pretty secure but do feel that there will be an impact on income because of declining non essential patient visits etc.

    • retirebyforty March 17, 2020, 7:56 am

      Wow, lucky! Nice job getting more conservative at the right time.

  • Revanche @ A Gai Shan Life March 16, 2020, 10:51 pm

    For the past two years I’ve been anticipating the recession and trying to balance investing regularly to avoid a market timing mentality and stashing cash for the purchases I want to make in the inevitable downturn. Looks like it’s here but I will continue to pace my purchases carefully so I don’t blow the whole stash well before the bottom. And also it’s important to us to look out for the folks among us who need a helping hand to get through. I remember the pain of the 2008-2009 recession very well including a whole year of unemployment so I’m counting myself highly fortunate to have come so far since. I had a helping hand here and there so now I am paying it forward in hopes it helps someone stay on their feet and that they will pay it forward and help someone in their future as well. Taking care of your community is important.

    • retirebyforty March 17, 2020, 7:56 am

      Good move. It’s getting scary on the market. Now, I think it’s heading under 40% drop. Pace yourself and good luck!
      You’re right. Look out for friends and families. Try to support local businesses if you can.

  • Done by Forty March 16, 2020, 10:27 pm

    This is just a great primer, Joe. 2008 seems like a long way off now, doesn’t it? But the lessons are the same: get an emergency fund, try to be conservative, try to keep your job or find another asap, and if at all possible, keep investing (& avoid selling low).

    I can’t decide if it’s a good thing that this happened right before we hit financial independence or not. But I suppose better now than right after we pull the plug, right?

    • retirebyforty March 17, 2020, 7:54 am

      I think it’s good because you can test your worst-case scenario. You can decide to keep working if this thing drags on, right?
      For the FIRE movement, earlier is better.

  • Michael @ Financially Alert March 16, 2020, 4:08 pm

    I’ve always found it fascinating that the downturns are super quick, while the upward movements are much more gradual.

    We’re just sitting tight at the moment, although I did help my inlaws to reposition before the big shifts of the past couple of weeks.

    Stay safe, Joe!

    • retirebyforty March 17, 2020, 7:53 am

      Sitting tight is probably the best strategy right now. The market is still falling.

  • Fritz @ TheRetirementManifesto March 16, 2020, 3:08 pm

    “It’ll be another bloody Monday on Wall Street, most likely…”

    You nailed it, Joe. Folks haven’t seen the bear come out the woods for a decade, and it’s easy to forget how scary he can be. It’s for moments like these that we have a bear strategy in place long before he appears. Now, it’s a simple matter of execution over panic.

    • retirebyforty March 17, 2020, 7:53 am

      You’re right. Now, it’s about execution. It looks like we’re heading into a bad period. News are getting worse and worse. You have to be really brave to buy. I’m starting to get more nervous.

  • e March 16, 2020, 12:52 pm

    Here is my play. we have two years of cash to pay for living expenses. will curtail our travel budget to reduce cashflow needs. my spouse plans to retire this year. I plan to sell some stock to incur a capital loss and withdraw from his 401k this year. The net loss will help to offset the Taxable income from the 401K. Plan to keep some of this 401k distribution in cash and invest some in the Market. Hopefully by next year this 401K proceeds will be at pre-Corona levels….. and we only had to recognize the Income at post-corona amounts.

    • retirebyforty March 17, 2020, 7:51 am

      Good luck! It’s a tough time to retire. 2 years of cash will help a lot.

  • Lily March 16, 2020, 10:32 am

    That’s a good guide! I don’t think it’ll go down pass 40% either, I just don’t see it getting that bad and stay there for long, there’s a scent of hysteria in all of this.

    • retirebyforty March 17, 2020, 7:50 am

      It’s starting to look really bad now. The Fed’s action didn’t help much. Now, I think it’ll drop below 40%. Good luck!

  • Jim @ Route To Retire March 16, 2020, 10:20 am

    Great information as usual, Joe! Similar to you, I’m buying more and more as the market drops. My concern funny enough is that I run out of money to throw in as it continues to drop (without touching our bucket 1 money, of course).

    I have a couple more limit orders set, but I could only imagine that as company earnings are released down the line, prices should continue to drop. I guess that’s a good problem to have! 🙂

    Hang in there and stay safe!

    • retirebyforty March 17, 2020, 7:49 am

      I think we should be a bit more conservative at this point. The market looks more and more like it will drop below 40%. Tough times are coming. Stay safe!

  • freddy smidlap March 16, 2020, 9:59 am

    at the peak we were around 17.5% cash with a target of 15%. we have 1.5 jobs right now so we’re living off cash flow from those but this is my biggest takeaway lesson and it’s hard: sell that 2% to keep the asset allocation you want when times are very good. that 2% was enough to replace more than 1/2 a year of spending and also would provide some firepower when it’s time to buy. i did deploy some cash last friday in the 401 to buy small caps. i didn’t use it all up, though. you are so right that cash is king.

    • retirebyforty March 17, 2020, 7:48 am

      Yeap, you need liquidity when the recession hit. Now, I’m starting to be afraid to buy more. The financial news are getting really bad.

  • DaveSaves March 16, 2020, 7:48 am

    When you say cash, do you mean physical green, or savings held at an institution? I do have a little cash in the bank, but get worried with the fractional reserve banking method. Will it be there when I go to take it out, or will it be frozen in a bank bail-in scenario? How likely is this if our deposit accounts were invested in some sort of bad debt by the bank?

    • retirebyforty March 16, 2020, 8:16 am

      Our cash is in a saving account. We have a few hundred dollars in physical money, but that’s it.
      I don’t think it’s a big deal this time. The bank is backed by the federal government.
      You should be able to get your money.
      Some physical cash is good in a physical disaster like an earthquake. Then, it’ll be hard to get cash.

  • Lazy Man and Money March 16, 2020, 3:33 am

    This is a great guide. It’s too bad that it will be a little for a lot of people to do too much.

    We’re in a similar situation with you and I’ve been doing a similar thing with our bonds. We we only about 12% bonds, so I’ve been selling them off 2% at a time when the market drops 5%. I wish I was more conservative now, but that might have meant losing a lot of the gains we did over the last 11 years. Looking at the glass being half-full, I had no bonds for so many years, so getting to 12% is a blessing that took a lot of small sales over months. I didn’t wake up one morning and say, “Well time to sell 10%.”

    • retirebyforty March 16, 2020, 6:52 am

      Right. It’s too much for regular households. If you haven’t prepared, you’re probably going to get screwed. Most investors should stay the course. Don’t panic sell.
      Anyway, this is a good lesson for next time. Everyone needs a plan before the stock market crash. I should have written this one in early January…

  • Dave @ Accidental FIRE March 16, 2020, 1:25 am

    Great post and advice Joe. I’ve got a very large stash of cash and I’m sitting pretty. Also even though I went down to half time at my job over 2 years ago it’s very secure. I still don’t wish to go back full time but if things really got dire I could.

    And I picked a great side hustle in graphic design as it’s all online and my sales are up as people are staying home clicking around endlessly on the internet. If things stay on the up and up I’ll make $10,000 to $15000k this year extra just doing designs. As people’s income gets affected from this though sales could be impacted later on, we’ll see. But right now for “social distancing” it’s the perfect side hustle.

    • retirebyforty March 16, 2020, 6:50 am

      That’s great. Nice job with your savings. If this thing drags on for 2 months, a lot of people will be in huge trouble. The government promises to help, but it seems regular people are always the last in line. Corporations always get financial help first.
      Your side hustle is perfect. You don’t have to interact in person. I’m curtailing scooter charging until further notice. It’s not safe right now.

  • Mr. Tako March 16, 2020, 1:04 am

    Some great advice in this post Joe! Nice job!

    And you can bet I’ve got a plan! With over half a million sitting in cash right now, I think we’ll be OK for the next year, or five.
    At some point, when I start to see some really good assets going for bargain prices I might invest some of that cash…

    In the short term, it looks like the news is going to keep get worse (before it starts getting better).

    Good luck!

    • retirebyforty March 16, 2020, 6:47 am

      Great job being conservative. There will be a lot more deals in the coming days. Most people won’t have much left in cash to take advantage of it.
      Stay safe.

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