Don't Make These 3 Mistakes During a Stock Market Crash

"Anything that can go wrong, will go wrong" - Murphy's Law.

EVERY investor, newbie or seasoned, must have a plan in place to successfully navigate an across-the-board stock market crash. Welcome back to the Don't Die Broke Coffee Shop. Let's chat!

For example, if there was a power outage (well, more like when there is an outage with the state of our U.S. electrical grids), you might prepare in three ways:

1. Buy a home back-up generator in anticipation of an outage

2. Panic and drive away on the nearest crowded highway as soon as the power goes out

3. Stay in place because you know the power will eventually return even though some of your food might spoil

The most important thing with a power outage is to have a plan. Of the three options, perhaps the worst option is to panic and run. After all, the highways could be crowded, you could run out of gas (or electric), or you could get into an accident!

Don't Be This Dude!

The same holds true for sudden stock market crashes. Your stock portfolio will nosedive at some point. We have quite a bit of turbulence in our world (uh...pandemic). A crash could happen this year or sometime in the near future. We have to keep in mind though that historically, the stock market recovers from downturns. The only way to successfully navigate a decline, whether long-term or short-term, is to have a plan in advance and stick with it. Going into a panic and jumping out of a window is not an option if you have a solid plan in place!

The 3 BIG MISTAKES!

1. USING YOUR STOCK MARKET INVESTMENTS AS YOUR EMERGENCY FUND

i think the BIGGEST MISTAKE an investor can make is not having six months of emergency funds put away before beginning an investment plan. In Don't Die Broke: Easy Steps on How to Save, Invest and Build Your Wealth, we recommend a savings & investment plan. Notice - savings is the first word! With emergency funds in place, this helps you avoid liquidating your portfolio in a stock market crash or downturn,

Let's say you had an emergency car or home repair, You surely don't want to be dependent on using your stock market portfolio as your emergency fund. Why? If the market crashed right when you need that money - you could be out of luck! For example, say you invested $3,000 in your stock portfolio. You needed $2,500 in emergency home repairs, but the market suddenly slid 33% and your portfolio was now only worth approximately $2,000. The market would come back eventually, but you would not experience this recovery because you liquidated your portfolio for the repair of your car or home.

Also, if you have an emergency fund, don't be afraid to tap into it. An EMERGENCY FUND is for emergencies! That's why it's there. If you liquidate stocks that made a profit to address your emergency, you could subject yourself to capital gains taxes. If you sell the stocks that are not worth what you invested, you risk losing the gain that would occur as the market returns. Hhhmmmm.

2. SELLING IN A PANIC!!

Every long-term investor (still the most effective way to invest) has seen their investment portfolio value drop unexpectedly when an across-the-board stock market crash takes place. But, these long-term investors know the secret - you only lose money when you sell your investments.

What happens if you do nothing during a market crash? Not much. You'll only see your account balance decline on your computer screen. It will be lower than the day or week before. When these crashes take place, know that the stock market has a verifiable track record of recovering from every downturn over the last 100 years or so.

Put the Panic button in a drawer and breath deeply. Eventually, the market will come back.

3. NOT BUYING WHEN THERE IS BLOOD ON THE STREETS

"Be fearful when others are greedy, and greedy when others are fearful," said Warren Buffett, a phrase that encapsulates the contrarian philosophy.

Ah to be a contrarian investor! When stocks are down across the board, this is a great time to pick up shares in solid companies that you have been following. This is bargain hunting at its best as you could pick up shares at a 25% - %30 discount! It also provides a great opportunity to diversify your portfolio through the addition of stocks in different sectors or through index funds. Index fund investing is still the best approach for new investors!

Just like you don't want to hit the panic button and sell during a market crash, you also don't want to be the ostrich with its head buried in the sand!

Just like a preparing for a possible power outage, you most certainly want to have a plan in place for a potential stock market crash. We all hope neither event ever occurs, But with an across-the-board stock market crash, if you have a plan in place, you will emerge in a much more financially stable position!

Don't Die Broke!

Learn more about investing in Don't Die Broke: Easy Steps on How to Save, Invest, and Build Your Wealth by R.L. Borom.