After 45 years living in Southern California, I realize that earthquakes are a fact of life. If you, too, live in the land of quakes, you know the feeling all too well: there you are, going about your business, and suddenly the ground begins to roll beneath you. First you do a quick check to see if it’s just a truck passing by, or an actual earthquake. With your initial fear confirmed, next comes the knot in your chest, followed by a silent scream of the question: “Is this the Big One???” Luckily, it’s rarely more than a tremor. In moments, the rolling subsides, minor damages are assessed (did Grandma’s crystal survive?), and you move on with your day (only after checking online to see just how big that ‘little’ quake really was). Yet every time it happens, the reaction is the same. Fear takes over, and our survival instinct delivers an instant five-bell alarm—no matter how large or small the real emergency may be.
Unfortunately, quakes in the stock market can affect us the same way. In my experience, nobody is ‘cool’ when the market is volatile! That’s especially true for those of us who have lived through a ‘Big One’ in the past. It’s too easy to remember how it felt in 2008 when bad lending practices, high-risk banking policies, and the bursting of the US housing bubble created the perfect storm that drove the worst stock market crash since the Great Depression. (Just thinking about it makes my stomach do a flip!) It’s no wonder that whenever the market tumbles, we react with fear. It’s normal. And it’s okay—as long as we don’t react and make quick decisions that can worsen the situation, sometimes dramatically.
When the Covid sell-off took place in March 2020, I spent many hours counseling a small handful of clients (and a few frightened friends) who felt that the best way to protect their nest eggs was to pull their money out of the market and ‘rest easily’ in cash. Luckily, almost no one I know ended up acting on that knee-jerk reaction—especially since ‘getting back in’ is rarely easy. If the clients and friends I advised had let their fear preside, they could have missed out on the incredible market run-up of the past two years.
How can you continue to make wise investment decisions—even as that knot in your chest and your desperate need to know if this is the ‘Big One’ sound the five-alarm bell in your head? As with many things in life, the answer lies in being prepared. Like your earthquake survival kit gives you peace of mind because you know there’s enough drinking water, protein bars, flashlights, and batteries to carry on after a major earthquake, putting a few key items in your ‘stock market survival kit’ can make it easier to rock and roll through market tremors when they happen. Here’s what to toss into your kit:
- A diversified portfolio.
If you watched the S&P 500 index soar to new heights in late 2021 and wondered why your own portfolio wasn’t keeping pace, it’s likely because you already own a carefully diversified collection of assets designed to hold steady in a variety of market conditions. Ideally, your portfolio should include a balance of stable investments (such as mutual funds and bonds) and growth investments (including a strategic mix of US and international stocks). If you’re overweighted in any one asset class, now is the time to make a change.
- A cash reserve.
Having some relatively liquid assets on hand in a market downturn is vital. It doesn’t matter whether your reserve includes short-term bonds, a high-interest savings account, or actual cash under the mattress. What does matter is that you have enough on hand to cover your living expenses so your invested assets can remain in the one place that offers long-term growth: the stock market. While there is no magic number that tells you exactly how much reserve to set aside, a general rule is that if you are retired and taking most or all of your income from your investment portfolio, have at least a two-year reserve. If you are still working, or if you are retired and receiving a sizable pension, less is needed. Your financial advisor can help you determine an appropriate amount for you.
- A good memory.
You may remember the day the market crashed in 2008, but do you remember what happened in the years before and after? In September 2007, the Dow Jones Industrial Average (DJIA) was at 18,500. It then fell sharply, dipping below 10,000 in March 2009. Just four years later, it surpassed its previous high, and today, 13 years after that particular ‘Big One’, the DJIA is swimming in record highs that are double its 2008 starting point. For a long-term investor, you couldn’t ask for a better outcome—and it is a pattern that has repeated itself after every major market crash in history. It’s a good thing to remember whenever fear sets in!
No one can predict when the next big earthquake will hit—or when the next big market crash will happen. But knowing you are well prepared may help assuage your fears at the moment and, even better, help you fare well in the aftermath. And from that place of safety, you can focus on doing good for others so that they, too, can get through the ‘Big One’ whenever it does come.