Investing Simple Logo
Webull free stock promotionWebull is a free stock trading app that can allow you to earn compound interest by investing in the stock market.
Get Up To 12 Free Stocks Worth Up To $30,600!
Webull is a commission free stock and crypto trading platform. Right now, Investing Simple readers can get up to 12 free stocks with their current promotion. Open an account to receive 2 free fractional shares worth $3 to $300. Deposit any amount of money to receive 4 to 10 more free fractional shares worth $7 to $3,000. Promotion expires 10/31/2022.
Webull free stock promotion
Get Up To 5 Free Stocks From Webull
Open a new Webull brokerage account today and deposit any amount of money to receive 5 free stocks. Webull offers commission free stock, ETF, option and crypto trading.
Written by Ryan Scribner on February 9, 2022
FTC Disclosure

What To Do Before, During And After A Stock Market Crash

The stock market can be a scary place for many people. Though the stock market has made many, many millionaires, it has also hurt a lot of people who got caught in a sticky situation.

Before we dive in, it's important to note some critical concepts about the stock market and stock market crashes.

First of all, nobody knows when the next stock market crash will occur. While many will try to convince you otherwise, predicting the next crash is impossible.

Second of all, timing the market is impossible. A lot of people come up with the idea that they will be able to exit and reenter the market at the perfect time. While this idea looks good on paper, it probably won't turn out like this. The reason behind this is what we have already mentioned; you have no idea when the market has reached the top or the bottom.

Third and finally, during a stock market crash no action is necessary on your part. When it comes to investing, activity is often the enemy. Emotions get involved when stocks are making drastic price moves, up or down and this often results in poor decision making. When it comes to the stock market, sometimes the right thing to do is to do nothing at all.

Best Free Stock Promotions

Robinhood Logo1 Free Fractional Share Worth $5 To $200, 18 Companies To Choose FromDownload
Webull LogoWin Up To 12 Free Stocks Worth Up To $3,000 EachDownload
M1 Finance Robo Advisor$10 Bonus (When You Deposit $100+)Download
Moomoo LogoWin Up To 5 Free Stocks Worth $3 To $2,000 EachDownload
Acorns LogoFree $10 Bonus When You Invest $5+Download

What Is a Stock Market Crash?

The words crash, correction, and bear market are often used interchangeably. It is important to understand the difference between these.

A correction is a relatively frequent occurrence. This is a drop in the price of an asset or financial market of ~10%. Stocks correct all the time and occasionally, a broad market correction will take place. Recently, we saw this happen with the S&P 500. In 2017, the stock market virtually went up in a straight line. This trend continued into 2018 until a correction took place at the end of January.

The S&P 500 corrected from a high of $2,900 to $2,580 in February of 2018. This correction of 11% signified that the market was blowing off steam after an unsustainable run.

A bear market is a less frequent occurrence. Over the last 100 years, we have seen a bear market on average every 3.5 years. A bear market is a drop of around 20%. However, these tend to last much longer than a correction. Full recovery from a bear market typically takes place within 15 months. The last bear market we saw was in February of 2020 right at the onset of the coronavirus pandemic. The S&P 500 dropped 33.9% from February 19th to March 23rd. Although this bear market only lasted 1.1 months (the shortest on record) it shook the stock market to its core.

A stock market crash is a very infrequent occurrence, happening about every 10 years. This is a massive correction that far exceeds the 20% dip that indicates a bear market. A crash is a drop of 40% or more. For example, the crash of 2007 to 2009 resulted in a 54% drop in the Dow Jones Industrial Average. Before that, the last stock market crash took place in the early 2000s during the dot com bubble. A stock market crash is the result of unusual circumstances when a bubble has formed.

What Is a Bubble?

A bubble forms when hoards of people begin to invest in a particular asset. As more people invest, the market value, or what people are willing to pay, drifts further and further away from the intrinsic value, or the actual underlying value of the asset.

Eventually, the price gets so out of control that people are no longer willing to pay it and the buying pressure tapers off. As the price plateaus, people begin to sell and the price starts falling. This is far more common with individual assets, but entire markets can become a bubble. For example, the dot com bubble in the early 2000s and the housing bubble a few years later.

The most recent example of this is the cryptocurrency bubble that formed in 2017. Bitcoin, the most popular cryptocurrency, went mainstream. In January of 2017, each Bitcoin was worth around $1,000. As the year continued, the price climbed higher and higher. At the end of this Bitcoin mania, each digital coin was trading for just over $19,000 in December of 2017. This massive run-up indicated a speculative bubble had formed, as this level of appreciation is not common with any assets.

People were excited over this new currency, but this excitement led to hysteria. The bubble burst at the end of 2017, and by February of 2018, each Bitcoin was worth just under $7,000. This was a drop of over 60%, which indicates that this was a crash. A market crash occurs as a result of unusual circumstances. In this case, it was millions of people rushing into a digital currency.

What to Do Before a Crash

If you believe that a market is becoming overvalued and you want to take some precautionary steps, here are a few that you could do. Again, we reemphasize that no person or institution can see the future and know when a stock market crash will occur. This is why we recommend having a diversified portfolio to guard against all adverse market conditions.

  1. Simplify your portfolio. If you are holding individual stocks, consider what companies you are investing in. Are you holding durable consumer staple stocks? Or volatile biotechnology stocks? If there is ever a time to invest in these high-risk stocks, it is not when markets are at or nearing all-time highs. Remember, a focus on long-term gains will pay off much better than trying to hop onto a hot streak.
  2. Increase your cash reserve. One of the best things you can do before a crash is to increase your cash on the sidelines. Stock market crashes provide incredible opportunities for those with cash to capitalize on discounted companies. Those who have cash view stock market crashes as a huge sale on stocks. If you are fully invested in the market, you are completely immobilized in the event of a crash. Your only option is to ride it out.
  3. Write down what you own and why. You will want to have a clear idea of what you have in your portfolio and why you have it there. During a crash, emotions get involved and people will often make impulsive decisions. You should hold onto this written reminder in case you are tempted to take short-sighted action.
  4. Diversify. One of the best ways you can minimize risk is through adequate diversification. A good rule of thumb to follow is to never have more than 20% of your money in any one thing. If you do, you are probably too heavily invested in that asset.
  5. Allocate more money into bonds or precious metals. During times of uncertainty, many investors will flee to other investments like bonds and precious metals. Gold has proven to be a suitable investment for outpacing inflation. On top of that, gold tends to hold up well in the event of a stock market crash as more money is being directed toward this asset.
  6. Go for a walk. Seriously! It is easy to drive yourself crazy worrying about your money and your investment portfolio. You want to make sure that you are keeping your emotions under control so you don't make an impulsive decision. You can take steps to prepare for a crash, but beyond that, you cannot control it. If you cannot control it, there is no reason to worry about it!

What to Do During a Crash

If you believe you are currently invested in a market that is experiencing a crash, here are a few things you could consider doing:

  1. Nothing. As mentioned already, one of the best things you might do during a market crash is to do nothing. Others around you will be generating a flurry of activity, and many will be making the fatal mistake of selling. Remember, it is not a loss until you recognize it! If you took steps to prepare for the crash and you are diversified across different assets, there is nothing for you to do.
  2. Be patient. If you are planning on taking advantage of the sale and scooping up stocks, do not rush! During a bear market, there are often several false bottoms that will continue to be breached as the market falls. At this point, the market is a falling knife! Wait for clear signs of a bottom or follow some of the bear market investing strategies we will discuss shortly.
  3. Write out a plan. Do not just randomly start buying stocks left and right. If you are planning on buying, consider what stocks you are looking for. Are you going to look for battered blue-chips? Small-cap stocks? You need to write out a clear action plan outlining what stocks you are looking to buy and at what price you are willing to pay. Failing to plan is planning to fail.
  4. Educate yourself. This can be a perfect opportunity to educate yourself on the stock market and what is going on around you. Before you make any decision, do your due diligence. You might want to consider discussing with a financial expert before taking any action in a bear market.
  5. Study the charts. While it is impossible to time the markets and identify the bottom, you can make an educated guess. By studying candlestick charts and learning about support and resistance areas, you can identify when a stock is testing a support. If it breaks down below the support, you know the stock is likely still in free fall.

What to Do After a Crash

If you believe the stock market has crashed and you are ready to take advantage of the opportunities, here are a few steps you could follow:

  1. Dollar-cost averaging. This is one of the best ways to enter the stock market, especially in a bear market. As we mentioned earlier, many false bottoms often appear during a bear market. If you drop all of your money in at once, and the bottom is yanked out from under you, you are in a free fall. By dollar-cost averaging, you are accumulating shares over time and paying the market average for these shares. In a bear market, this is likely going to be averaging down or lowering your average cost basis. Let's say you wanted to invest $10,000 in an S&P 500 index fund at the bottom of the market. Instead of dumping $10,000 in at once, you could invest $1,000 per month over 10 months to dollar-cost average.
  2. Blue-chip and AAA-rated. Another strategy you could follow is to only invest in durable companies with an excellent debt rating. Companies often raise capital by issuing debt obligations known as corporate bonds. These bonds are rated by agencies like Moody's and Standard & Poor's for creditworthiness. The highest rating a company can receive is a AAA rating. This company has a high degree of creditworthiness and the lowest risk of defaulting on these obligations. The problem is, increased corporate borrowing has significantly reduced the number of companies with this prestigious AAA rating. In fact, there are only two: Johnson & Johnson and Microsoft. You might need to lower your standards to a AA+ or AA for a broader selection. Another option is to invest in what is referred to as blue-chip stocks. These are durable companies that have stood the test of time. While there is no official list of blue-chip stocks, most people refer to the Dow Jones Industrial Average.
  3. Hunt for dividends. During a bear market, it is not uncommon to find a great company paying out a 10% dividend yield. It is important to understand that you should not simply look for stocks with high dividends! A dividend is never guaranteed, and a company could cut or cancel a dividend at any time. What you want to look at instead is the dividend growth streak. This is an indication of how long this company has been increasing its dividend payment. If a company has a 20+ year growth streak, it will do anything it can to continue paying that dividend. One of my favorite resources for researching dividends is Simply Safe Dividends. In this article, over 20 high dividend stocks are analyzed. For example, consider AT&T. This company has a dividend growth streak of over 30 years! The company may cut the dividend, but based on the growth streak and consistent operating history it is highly unlikely.

While you may be tempted to simply invest in the companies that have been hit the hardest, this might not be the best strategy. During each bear market, massive companies that were once considered untouchable have gone bankrupt. This includes:

  • Texaco 1987
  • Pacific Gas & Electric 2001
  • Lehman Brothers in 2008
  • Washington Mutual in 2008
  • General Motors in 2009

These were massive companies that appeared to be safe but time proved otherwise. If a company ends up going bankrupt, you are one of the last people to get paid as a shareholder. You will likely see nothing.

If you have properly prepared, one of the best things you can do during a stock market crash is to do nothing at all. While you can take some precautionary steps to plan for a correction, you can never know for sure when it will take place.

What Tools to Use to Prepare for a Crash

One of these precautionary steps is to get registered with Front. Much like your credit score indicates your level of risk to a lender or bank, your Front score can indicate the same thing about your portfolio. By using this new app, you can link all of your investment accounts to see where your portfolio stacks up in the face of adversity.

This smart portfolio analysis could provide insight into your portfolio blind spots and alert you when you are too concentrated in one market. Diversification is key to weathering the storms in the stock market and your Front score can help you recognize where you have room for improvement.

Not only does Front provide you with a score based on your risk and diversity, but it also allows you to follow other investors to see where they are putting their money. You can follow along with big bets and truly have a social experience in a stock trading environment.

Front also comes with breaking news and alerts that you should be aware of in this fast-paced world. If you want to double check that your portfolio is in the right place, Front is a great place to start!

What To Do Before, During and After a Stock Market Crash: Final Thoughts

While you may be thinking that these suggestions might be overly simplistic, remember that sometimes inaction is the best action in the stock market. This is counterintuitive and goes against your emotions, but often, it's the best thing to do. We are all irrational individuals that make decisions based on limited information. Don't let your emotions or FOMO influence you to make a poor decision.

Most importantly, do your research and make educated decisions based on fact and not simply a feeling. While stock market crashes can spell disaster for corporations and individuals, you can safeguard your investments and even make huge gains by sticking to your guns. See a market crash as an opportunity, not as a disaster. This is what separates the truly successful from the average.

Article written by Ryan Scribner
Ryan Scribner is a personal finance YouTuber that is approaching 500,000 subscribers on his channel. He has created a thriving business around his passion, which is helping others navigate the complicated world of investing.

Platform Reviews

Power Your Investing

Choosing the right product and service is essential for your investing. Here are some of the tools and services to help your portfolio grow.
Robinhood provides an easy-to-use free trading platform for beginner investors. Robinhood has $0 account minimums. Get a free stock when you open an account below.
Try Robinhood
M1 Finance
M1 Finance offers a free investing platform where users can build portfolios of stocks and ETFs. Users can also choose from a variety of pre-built portfolios offered for free.
Try M1 Finance
Passively invest in private real estate deals with as little as $10. Fundrise allows you to own residential and commercial real estate across the U.S. starting at a 1% annual fee.
Try Fundrise
Copyright © 2018 – 2022 Investing Simple LLC. All Rights Reserved.
Investing Simple is a financial publisher that does not offer any personal financial advice or advocate the purchase or sale of any security or investment for any specific individual. Members should be aware that investment markets have inherent risks, and past performance does not assure future results. Investing Simple has advertising relationships with some of the offers listed on this website. The information on Investing Simple could be different from what you find when visiting a third-party website. All products are presented without warranty. For more information, please read our full disclaimer.
Website managed by Stallion Cognitive™
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram