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What To Do When The Stock Market Crashes?

Stock market crashes are unavoidable, regardless of how you feel about what I'm going to say.

The next collapse may come at any time; we have no idea when, how long, or how steep it will be. Doubling-digit losses in the S&P 500 (SNPINDEX: GSPC) are quite frequent than most investors think, based on past experience.

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History: About Crash in the Stock

Taking a trip down memory lane and looking at historical averages, the chances of a dual-digit correction or collapse within the next 12 to 18 months are extremely likely. For instance, every bear market since 1960 has experienced at least one double-digit percentage pullback within three years of reaching a bear-market low (excluding the coronavirus collapse in 2020). 

Two-digit losses occurred within three years in almost half of the bear markets studied. Since the bear market bottom was reached almost 14 months ago, the S&P 500 has yet to see a double-digit decline.

Shiller's P/E ratio for the S&P 500 is alarming, as well. There was an increase in this week's Shiller P/E ratio to 37.32, which considers inflation-adjusted profits over the preceding ten years into consideration The S&P 500's Shiller P/E ratio has a 150-year average of 16.82.

Worse, the Shiller P/E of the S&P 500 has fallen by at least 20% each of the last four times it has passed and maintained the 30 levels in a prolonged bull market.

Thus based on market research firm Yardeni Research, the S&P 500 has seen 38 consecutive years of declines in the double digits. Every 1.87 years, that's a significant decrease.

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Next Stock Market Crash Checklist

Long-term investors, on the other hand, should not be concerned. A collapse may turn out to be an amazing money-generating prospect for those who are psychologically and economically equipped for it. Brace yourself for the next stock market collapse with the help of the following checklist.

• First Relax and Take a Deep Breath

Inside the event of panic selling, take a deep inhale and remember that it's half of the long investment process. One just might say it's the cost of entry to the world's biggest wealth generator.

According to the data, there has been a 10-percent decrease every 1.87 years during 1950. What you may not know, however, is that each and every one of the S&P 500's 38 adjustments and collapses have been completely wiped by a bull market rebound. The majority of the time, it takes anything from a few weeks to a few months to see significant losses in the stock market.

• Understand Your Risk-tolerance Prior to a Crash happens

It's a good concept to know your investing appetite for risk until the next collapse or significant correction occurs. If, for example, the thought of seeing your elevated stocks fall by half causes you to lose sleep, you definitely shouldn't participate in growth companies. 

My example comes from the coronavirus collapse, which saw a significant drop in the worth of several top-performing growth companies during the previous year.

Remember, however, that conservatism in investing does not need a substantial reduction in the potential for wealth development. If you bought an S&P 500 monitoring index in 1980, you would have lived through the catastrophic single-day collapse in 1987, the dot-com boom, the Great Recession, and the coronavirus crash, hypothetically speaking. 

What do you get as a reward? Despite the losses, investors are still seeing total returns of 11% annually (including dividends).

• Take the Time to Regular Reassess Your Holding

Despite the fact that a collapse isn't necessary, panic dumping in the market as a whole is usually a good moment to take stock and reevaluate your holdings. In other words, determine whether your original investment hypotheses are still valid. A stock market collapse or correction is rarely to change the reasons you purchased a stock in the first place.

Selling or decreasing your holdings may be worthwhile if your investing thesis changes or is shattered.

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• Ignore the White Noise of Emotions

Typically, we won't know what precipitated a stock market collapse until after it has already occurred. However, the most important factor in car accidents isn't something you'd expect to hear about in the news. Short-term traders' fear is to blame, not fundamentals.

Once the stock market collapses, we have no influence over how other investors will react. You can rely on past and investing research to show that market corrections and collapses are often brief in duration. To accumulate money over the long term, it is critical to ignore the intense emotions that surface during stock market collapses.

• Have funds at Ready to Get Discounts

Having some dry powder on hand for a quick trip to the store when the stock market collapses may seem obvious, but it's always a good idea. Due to the fact that every single correction or collapse is ultimately erased by a bull market rebound, every significant drop in history has proven to be a purchasing prospect. A crash is nothing more than a special deal at your favorite store that only happens once a year.

• Avoid Margin Like a Plague

The second thing you should avoid doing during a collapse or severe correction is using margin to boost your buying. This will only make your purchases riskier.

In the event of a margin call, you potentially lose more than your original investment, plus interest. In addition, employing leverage is a long-term effort to timing the market, which will fail miserably every time. Once the market's long-term trend is "up," using profit can be enticing. However, using margin during times of increased volatility is extremely risky.

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