3 Reasons To Worry About A Stock Market Crash
Buy and hold doesn’t always work…
Most investors preach a buy and hold strategy where you look for solid companies and wait several years for them to realize their potential. It’s a simple strategy that allows you to avoid the emotional side of investing.
At least, that’s what people tell you.
Buy and hold works for many investors, but caveats exist. In investing, there are no absolutes, no one way of doing things. We all have different levels of risk tolerance, financial goals, and stages of life.
Too many variables exist to say buy and hold works for everyone. Some people can weather a stock market crash just fine while other people would get devastated by one. If you fit any of these three categories, you might worry about a potential stock market crash…
You Rely On Your Portfolio
Every investor puts money into their portfolio with the hope of it becoming a nest egg. Some people cash out on their portfolios sooner than others, but the goal is the same…use the portfolio as a means to a better life.
Some people reached the “Promised Land” and live entirely off their portfolios. People who fit this category must continuously sell off some of their assets and/or not reinvest the dividends.
When a crash takes place, these people will still need money, but they’ll be forced to sell at a lower price. That means selling off more of their positions to cover expenses.
This risk factor is why older people tend to shift towards blue chip dividend stocks and bonds rather than chasing potential 10x opportunities. Even the safe stocks get hit hard in a crash, but not as hard as growth stocks.
Potential ways to navigate through this phase include selling puts on stocks you’d want to own anyway and a strong focus on cashflow producing assets.
You Don’t Invest Enough Each Month
In my opinion, people who have large portfolios and don’t contribute much to their portfolios nowadays get the most nervous during a crash. If you don’t keep much of the money you make, and your portfolio is the main driver of your net worth, you’ll pay considerable attention to each fluctuation.
It’s great to keep your eyes on your portfolio. You can reallocate your money when it makes sense, stay on top of your stocks, and find new opportunities.
However, you can’t control how stocks move. Your portfolio might go up 10% or it might go down 10%. You can do some research to figure out which stocks are intrinsically undervalued or which stocks offer great growth opportunities.
But at the end of the day, the market can throw a curveball at you and do the complete opposite of what you thought would happen.
The solution to this problem is to make more money and cut down on your expenses. That sounds simple enough in theory, but many people in this category spend too much time refreshing their portfolios every few minutes.
Review your expenses and see which ones you can cut down or eliminate. Apply for jobs on UpWork, consider other side hustles, and start creating content to grow your platform. If you always make enough income to cover your expenses and contribute a healthy amount to your portfolio each month, you won’t worry about timing the market.
You can always buy any dips and lower your cost basis because you consistent make healthy contributions to your portfolio each month. While a ‘healthy’ contribution varies from person to person, figure out what it means for you.
You Got On The Hype Train
Your portfolio consists mainly of meme stocks and overvalued growth stocks. It’s hard to sleep at night knowing your portfolio can easily go up or down more than 5% in a single day.
I honestly don’t know how people hold onto these types of stocks with their hard earned money and remain sane, but to each their own.
A stock market crash hits hype stocks the hardest. Not only are they ridiculously overvalued in the moment, but crashes bring significant attention to those valuations. A crash can turn any overvalued stock into an undervalued stock within a few weeks.
Almost no stock is safe from a crash, but hype train type stocks create the potential for 50–80% downside. If you only bought a stock because everyone else is talking about it, review the stock to see if it’s still a good fit in your portfolio.
If you follow the crowd, you’re more prone to panic selling when the stock price doesn’t go your way.
A buy and hold strategy works for many investors. However, if you need the money soon for retirement or find yourself holding onto incredibly risky positions, it’s understandable if you fear a potential stock market crash more than others. Shuffle your portfolio accordingly so you are more confident about anything the stock market brings your way.