Emotionally Prepared for a Market Crash

I am an optimistic leisure freak when it comes to living my early retirement lifestyle. Receiving a very nice portfolio statement just adds a smile to my face where I break into a skip when walking along.  However I can’t help but recall that I have been here before. I may be hearing some Déjà vu market news. So I ask myself. Am I Emotionally Prepared for a Market Crash? I do believe this is a question every investor today should be asking themselves.

I’m not predicting a correction or anything like that. But just questioning myself as to my emotional readiness if or when one does happen.

Dot.com (Tech) Bubble and Crash.

The similarities between now and the earlier Dot.com crash of 2000 are somewhat interesting. Depending on whom you ask. The Dot.com/Tech- bubble ran from 1995 or 1997 to its climatic end on March 10, 2000 when Nasdaq peaked at 5,132.52. On October 9, 2002, Nasdaq hit its low at 1114.11 points. A screaming 78% drop. After that crash things didn’t start to slowly improve until 2003. It took all the way until March 2, 2015 for Nasdaq to again reach and break 5000.00, closing at 5008.10.

So both times it peaked in the month of March and ONLY 15 years apart.  I clearly remember how I felt back then when I was just a few years into my ten-year retire early plan. I was totally bummed about the portfolio setback but continued my same monthly 401k and Roth contributions. That said, I wasn’t exactly thinking how cool it was to be buying shares at a lower cost. My thinking was more like, I lost more than my Mortgage balance. I sure wished I had paid that off instead of lose it in the market. Not exactly a long-term investor’s mindset.

Real Estate Bubble induced Market Crash.

Who can forget the Real Estate bubble induced market crash of 2007 with the Dow peaking in September 2007 at 13930.01? It finally bottomed out in February 2009 at 7062.93. By then I was past my 10 year retire early plan. My portfolio had taken a severe beating because no investment class was spared when stocks took a near 50% reduction overall.  That Dow low in February 2009 took valuations all the way back to April 1997 to find a lower closing amount. WOW! Over a decade of gains flushed away, or was it?

The Dow’s Peak in September 2007 was not again matched until February 2013. It took over 5 Years and it has certainly climbed past that mark. If you held your ground and didn’t sell you came out fine. If you continued to buy during what turned out to be a “market on sale”, you did even better.

Now after detailing the last 2 crashes, aside from the months involved in the above market downturns and recently hitting the Nasdaq highs there is little else to compare between today and back then as business earnings and other things are far different. Not to say there are no other threats or concerns. Once again this isn’t about predicting that it is time to get ready for a crash.

What about today.

First off, I did retire in late 2009 at the age of 51. I was finally mentally ready to do so regardless of the recession and crappy market at the time. My mindset was different because I was older and I had already experienced the Dot.com Tech-bust.  I figured things would eventually turn around which brings me to today and my question.  Now that I am older and retired relying upon my portfolio, am I Emotionally Prepared for a Market Crash?

Yes I am, or I believe that I am. Now I say that hoping I won’t have to prove it. I do not want to go through that again but it is always a possibility and you can’t know when it is coming.

The difference now is I may not be working and still adding to my portfolio the next time and I will be definitely relying on my portfolio to fund my lifestyle. So what is it that can be done now so that I don’t leisure freak-out if (when) it happens again?

8 Tips to Help Become Emotionally Prepared for a Market Crash

Cash Bucket

For someone like me in early retirement and for those near retirement having 3 years of cash or near cash in a liquid account will help get through a downturn. As I described above it can take years for the market to begin its rebound and having cash means you can ride it out long enough to delay tapping your assets until they are on the climb up, not at the bottom.

Debt Free

Pay off debt and even your mortgage if you can. This will make living through a market downturn easier and should allow more flexibility in your spending if you need to make some adjustments to keep your long-term funding stronger.

Stay on Plan

For anyone still years from retirement you may be able to just stay the course. You may not have to make any changes to prepare for a market correction as long as you have done some of what is detailed below.

Proper Diversification

Make sure your asset allocation is diversified and your risk exposure is aligned with your goals and risk tolerance. Your Stock to Bond ratio should match your age and timeline using your method of preference within your plan. You may cut risk by also including some International stocks and stocks that generate income. Even though dividends can be reduced in times of market turmoil, having dividend and interest income generated without having to sell assets will reduce your market correction anxiety.

 Rebalance Asset Allocation

Always revisit your portfolio allocation annually or bi-annually and rebalance your asset allocation when necessary.

Stop Loss Strategy

You can place stops on your investments for protection in the case of a stock market crash. This can be tricky and requires constant adjustments over time and if enacted then be sure to get back into the market but do so knowing it is tough to call a bottom and easy to miss a big rally back up.

Buy Assets when everyone else is selling

Consider keeping some cash available to buy stocks which appear to be on sale during a market downturn. This is a good way to lock into some great dividend yields by buying when the stock price is low.

Consider a retirement side gig

For the early retired like myself, I am always open to finding work aligned with my interests and passions. A market downturn would be the perfect time to consider finding something or starting a sweet side hustle if I can to help get though a market crash.

Conclusion.

For those that are years away from retirement you should consider market corrections as buying opportunities. Although I continued buying at my allocated pace I missed having that mindset and maybe could have taken more advantage of that low value time-frame during the Dot.com bust.

I don’t think that there is anything that I can do that will completely remove a nasty emotional response like lots of cussing, kicking the can, etc. to a market crash and seeing my portfolio in the dumper but not negatively reacting emotionally by panicking and doing something financially stupid is the preparation goal. Creating a long-term retirement saving, investing, and then funding plan and sticking to our plan is the key to being Emotionally Prepared for a Market Crash. Oh it will still sting like hell but by staying disciplined and doing all that we can there should be no regrets and there is a far better chance of coming out of a market downturn with less emotional and financial damage.

Do you feel like you would be Emotionally Prepared for a Market Crash?

Do you have some other ideas that would help someone with their emotional preparation for a crash?

2 thoughts on “Emotionally Prepared for a Market Crash

  1. Nice post. I see what you did here. You listed everything that should be done to protect your assets as best as you can so you can be mentally able to accept a crash. Smart. I have been a very aggressive with my investing. I am getting within a few years of seeing myself able to retire early so I am feeling the tug to be more diversified.

    1. Thanks Franklin. For me taking care of the financial things is the only the thing that helps me be emotionally prepared to watch any down market times. I have always been financially conservative and risk averse. Yet a risk taker when it comes to retiring early and often.
      Tommy

Comments are closed.