DOs and DONTs of Market Crashes

The do’s and don’ts of a market crash
Washington Post, January 8, 2016




It’s that time!

Every few quarters, we find ourselves running through the same muster drill. Something happens somewhere in the world, the markets go a little nutso, and they sell off a dozen percent or so of their value. The usual suspects panic. Eventually things stabilize. And everyone wonders what the hell just happened. Post-mortem explanations come along that seem reasonable (after the fact, of course, never before).

Lather, rinse, repeat.

The phones ring with reporters wanting a comment on the volatility. “What’s going on in the markets?” they say. My response is always the same: “You won’t like my answer: This is what markets do — they go up and down, sometimes violently.”

“Thank you,” they say as they hurriedly hang up.

As of this writing, U.S. markets are down about 5 percent for 2016. European bourses are off about the same amount, as is Asia. China, whose market crash started this all off, is down 12 to 15 percent.

Given this week’s surprise, and how it cascaded around the world, it is as good a time as any to discuss what you should — and should not — do during a crash. (Print out this column. Read it again when the next one comes along).

Do take notice at how cyclical markets are. Markets rise and they fall with shocking regularity. They may not stick to schedules as tightly as the solar system does — think seasons, sunrise and sunsets, moon phases, even the appearance of comets — but they do move in semi-regular cycles.

I can do the drill in my sleep.

As do market corrections and crashes. Between 1950 and 2014, half of all annual periods saw a correction of 10 percent or worse. From the August highs to Friday, U.S. markets are down (surprise!) about 10 percent. Don’t be surprised if in two, four and six years from now, those markets also see a 10 to 20 percent correction.

Bull and bear markets come along on their own timelines, stay for as long as they like, then move on. There is not a whole lot you can do about it, except recognize that it happens.

Don’t react emotionally. Do not give in to your gut, which might cause a momentary lapse in judgment.

Remember, your “flight or fight response” is what causes stress — that knot in your stomach, sweaty palms, accelerated breathing and heart rate. The discomfort is a feature, not a bug. This agitation is supposed to crank up your body, make it ready to react to danger. It did a terrific job keeping your ancestors alive on the savannah, but works against you in the capital markets.

Adrenaline, it turns out, is not the basis of sound portfolio management.

Do stick with your plan. The reason you made a long-term plan in the first place is because you do not need access to the money you’ve invested in the next year (or the years after) but decades from now. In 2040, you will not care what the market did in January 2016.

The short term always seems to get in the way of the long term. I’ve heard countless stories from investors who panicked out of the market at the March 2009 lows and never found their way back in. They missed out on a huge climb in value. That’s not sticking to a plan, and it’s not what good financial planning looks like.

Don’t rely on gurus, shamans or talking heads. They haven’t the slightest idea about your financial needs, your risk tolerances or anything else about you.

I have been doing financial TV and radio for more than a decade, and having met many of them, I can tell you from my personal experience that most of them haven’t the slightest idea what they are talking about. The general advice they give is for entertainment purposes only.

Again, their forecasts amount to nothing more than marketing. Treat them that way.

Do notice your own state of mind. Are you agitated, freaked, stressed out? Is the market keeping you up at night? Notice the subtle difference between reacting emotionally to external stimuli and that nagging feeling that you forgot something important.

At times, your body may be telling you something. Is your portfolio in sync with your own risk tolerance? Are you carrying more exposure to high-risk assets than you are comfortable with? Have your circumstances changed but your portfolio has not?

Try to be perceptive to when your subconscious is trying to get you to notice something. It could be important.

Don’t take actions while in a state of discomfort. Decisions made to “stop the pain” are the ones you eventually regret.

The time for action is when you are in a thoughtful and calm state of mind. Any significant financial decision you make should be circumspect, carefully considered and according to plan.

If you are merely reacting to the latest market moves, then what you have is not a plan — you have an instinctual, fear-driven reaction, and it’s the makings of a disaster.

Do notice the panic around you. Watch the reactions — and overreactions — of the guests on financial television. How emotional and strident are they? Can you see them sweating?

There was a time during the financial crisis when I could tell how much the market was down that day merely by listening to Maria Bartiroma’s voice. There is a feedback loop from markets to TV anchors and back — see if you can spot it (just don’t become affected by it).

Don’t try to time the markets. You lack the skill, the discipline and the ability.

Even if you get lucky, it’s just that — dumb luck — and that serendipity is likely to encourage you to engage even more reckless and foolish behavior in the future.

The odds of you jumping out on time and getting back in are stacked against you. Add in taxes and other costs, and it becomes a fool’s errand.

Do look for signs of capitulation (or surrender). Market bottoms are made when a critical mass of investors folds, throws in their cards and panic sells. See if you can spot the moment when everyone finally cries “uncle.”

Don’t confuse the short term for the long term. The day-to-day action is noise, unless you are an active trader doing this for a living. You will lose money treating investments like trades and vice-versa.

Do have a sense of humor about this. My favorite thought on this came from a fund manager, who, in the midst of a nasty sell-off, was asked by a fellow trader how he was doing.

“Sleeping like a baby,” he calmly replied.

“Really? Given this crazy market, how can you sleep like a baby?”“Its easy!” he said. “I wake up screaming every two hours, wet myself and cry for Mommy.”That sort of gallows humor is typical on Wall Street. But if you follow the good advice above, you can sleep soundly, knowing your portfolio is working for you.


Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, The Big Picture. On Twitter: @Ritholtz.


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  1. rd commented on Apr 5

    It is clear that Kurt Vonnegut missed the point of literary criticism, which is to endow the unreadable with the term of literature while the rest goes in the trash. I think Shakespeare is one of the few readable things that is universally viewed as great literature, although I suspect that Shakespeare’s plays and sonnets became more popular with literary critics as his language became more antiquated, and therefore less comprehended by the common man.

    BTW – I think Shakespeare would have applauded Vonnegut’s thesis and would have put it to immediate use in developing his plot lines (if he wasn’t already doing something like this). I am sure that Jane Austen and Charles Dickens developed similar formulas. I am not exactly sure how you would graph Leopold Bloom’s day though.

  2. Singmaster commented on Apr 6

    The Seven Basic Plots by Christopher Booker

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