NEW YORK (AP) — The huge swings rocking Wall Street and the global economy may feel far from normal. But, for investing at least, drops of this size have happened throughout history.
Stomaching them is the price investors have had to pay in order to get the bigger returns that stocks can offer over other investments in the long term. Here’s a glimpse at what’s behind the market’s wild moves and what experts advise investors young and old to consider:
In today’s volatile financial landscape, many investors find themselves asking that dreaded question “Should I sell my stocks before a crash?” It’s a question that stems from fear anxiety and the natural human instinct for self-preservation. But is selling really the best strategy? Let’s dive deep into this topic and explore how to prepare for and survive market downturns without making panic-driven decisions that could harm your long-term financial goals.
The Temptation to Time the Market
I’ve been investing for nearly a decade now, and I still remember how my stomach dropped during my first major market correction. The temptation to sell everything and run for the hills was overwhelming. But here’s what experience has taught me – and what financial experts consistently confirm:
Timing the market is nearly impossible.
Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Yet most retail investors do exactly the opposite. We buy when prices are high because everyone else is buying, and we sell when prices are low because everyone else is panicking.
Why You Shouldn’t Make Decisions Based on Fear
According to recent insights from financial advisors, investors should not make decisions about their portfolio based on a feared downturn in the S&P 500. While you’ll constantly encounter arguments both for and against whether a big correction is coming, reacting to these predictions rarely leads to optimal outcomes.
Instead, financial experts recommend focusing on:
- Adjusting your risk profile based on your age
- Understanding your personal risk tolerance
- Planning for your long-term legacy
What Happens When You Sell Before a Crash?
Let’s consider some potential scenarios that might occur if you decide to sell your stocks in anticipation of a market crash:
- The crash happens – You feel like a genius temporarily, but then face the challenging decision of when to re-enter the market.
- The crash doesn’t happen – The market continues upward, and you miss out on potential gains.
- A minor correction occurs – The market dips slightly but not enough to justify the transaction costs and potential tax implications of your sell-off.
In a study tracking investor behavior during market corrections, researchers found that those who sold during downturns and attempted to time their re-entry typically underperformed those who simply held their positions by an average of 3.4% annually over 10-year periods.
Surviving a Stock Market Crash: Practical Strategies
So if selling everything isn’t the answer, what should you do to prepare for potential market downturns? Here are some practical strategies drawn from expert advice:
1. Focus on Valuation
As highlighted in Stephen Wright’s analysis, understanding the intrinsic value of your investments is crucial. Knowing that a stock is worth more than its current trading price makes it easier to hold on during downturns.
Consider the example of Zoom Communications mentioned in the article Its share price reached $559 five years ago, implying a market value of $187 billion. Yet with operating income less than $1 billion, it’s difficult to justify such a valuation. Unsurprisingly, the stock hasn’t returned to those levels
By focusing on companies with reasonable valuations relative to their earnings and growth prospects, you’re more likely to own stocks that will recover after a crash.
2. Maintain Adequate Cash Reserves
Having enough cash on hand for emergencies means you won’t be forced to sell stocks during a downturn to cover unexpected expenses, Most financial advisors recommend having 3-6 months of living expenses in a readily accessible emergency fund,
This cash reserve serves two purposes:
- It prevents forced selling during market lows
- It provides opportunity capital to invest when prices are depressed
3. Consider Defensive Stocks
Some companies tend to weather market storms better than others. The article mentions Warren Buffett’s Berkshire Hathaway as an example of a stock that might be worth considering during volatile times.
Companies with these characteristics often perform better during downturns:
- Strong balance sheets with minimal debt
- Consistent cash flow generation
- Businesses that provide essential products or services
- Conservative financial management
4. Diversify Appropriately
Proper diversification remains one of the most effective ways to reduce portfolio volatility. This doesn’t just mean owning many stocks—it means owning investments that respond differently to various economic conditions.
A well-diversified portfolio might include:
- Domestic and international stocks
- Companies of different sizes (large, mid, and small cap)
- Growth and value investment styles
- Some bonds or fixed income investments
- Perhaps a small allocation to alternative investments
The Psychological Aspect: Preparing Your Mind
Beyond portfolio construction, surviving a crash requires mental preparation. Here are some psychological strategies to help you stay the course:
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Remember your time horizon – If you’re investing for retirement that’s decades away, short-term market fluctuations matter less.
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Avoid checking your portfolio constantly – During severe downturns, reviewing your portfolio daily only increases anxiety and the likelihood of making emotional decisions.
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Have a written investment plan – Creating a document that outlines your investment strategy during both bull and bear markets can help prevent panic decisions.
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Consider working with a financial advisor – Sometimes having an objective third party can help you avoid costly emotional mistakes.
When Selling Might Actually Make Sense
I don’t want to suggest that you should never sell investments. There are legitimate reasons to reduce stock exposure, including:
- You’re approaching retirement and need to reduce risk
- Your financial circumstances have changed significantly
- A specific company’s fundamentals have deteriorated
- You need to rebalance an overly concentrated position
The key distinction is making calculated adjustments based on your personal situation rather than attempting to time market movements.
Real Examples From Previous Crashes
Looking at history provides valuable perspective. Consider these examples:
The 2008 Financial Crisis:
An investor with $100,000 in a S&P 500 index fund at the market peak in October 2007 would have seen their investment drop to about $50,000 by March 2009. However, if they held through the recovery, that same investment would be worth approximately $350,000 by 2025 (including reinvested dividends).
The COVID-19 Crash:
The market dropped roughly 35% in March 2020. Many investors panicked and sold. Yet within a year, the market had not only recovered but reached new highs. Those who sold at the bottom missed one of the fastest recoveries in stock market history.
A Balanced Approach: What I Actually Do
In my own investing journey, I’ve found that a middle-path approach works best. Rather than trying to predict crashes or ignoring risk entirely, I:
- Gradually adjust my asset allocation as I age and my goals evolve
- Rebalance periodically to maintain my target risk level
- Keep some dry powder (cash) for opportunities during downturns
- Dollar-cost average through regular contributions regardless of market conditions
This approach isn’t perfect—nothing is—but it helps me sleep at night while still participating in long-term market growth.
Practical Action Steps
If you’re worried about a potential market crash, here are some concrete steps you can take today:
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Review your asset allocation – Is your current mix of stocks, bonds, and cash appropriate for your age and risk tolerance?
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Check your emergency fund – Do you have enough cash set aside to avoid selling investments during a downturn?
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Assess individual holdings – Are there any investments in your portfolio with valuations that seem excessive or fundamentally unsound?
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Consider tax implications – If you do decide some selling is appropriate, understand the tax consequences first.
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Create a downturn action plan – Decide in advance what specific actions you’ll take if the market drops by various percentages.
Final Thoughts: The Courage to Stay the Course
Market crashes are inevitable. They’re painful, frightening, and sometimes prolonged. But they’re also temporary interruptions in the long-term upward trajectory of markets.
As the famous investment saying goes, “Time in the market beats timing the market.”
The question shouldn’t be “Should I sell my stocks before a crash?” but rather “Have I built a portfolio that can withstand a crash?” With proper planning, diversification, and mental preparation, the answer can be a confident “yes.”
Remember that the greatest investment returns often come to those who have the courage to invest when others are running scared. By preparing properly now, you can position yourself not just to survive the next market crash, but potentially to take advantage of the opportunities it creates.
What strategies have you implemented to prepare for market downturns? I’d love to hear your thoughts and experiences in the comments below!
Should I change anything with my investments?
For years, the U.S. stock market was the best by far to invest in worldwide. Now, more investors are questioning wither U.S. exceptionalism is dead.
But it could all be a reminder that investors often do best when they have a mixed set of investments rather than going all-in on just a few. And investors may no longer be as diversified as they thought after years of sheer dominance by the Magnificent Seven over the U.S. stock market and by Wall Street over global markets.
“It is hard to roll with the punches when some days you feel like your portfolio is being pummeled,” said Brian Jacobsen, chief economist at Annex Wealth Management. “But those moments should pass. A diversified strategy that is thoughtfully adapting to changing circumstances can’t prevent the punches, but it can help soften the blows.”
Phil Battin, CEO of Ambassador Wealth Management, advises investors to make sure they diversify their investments across regions and sectors to reduce risk. He says to lean towards “resilient sectors such as consumer staples, utilities and health care, which are less reliant on international trade.”
How bad is the market?
Wall Street’s main benchmark, the S&P 500, has lost more than 16 percent since setting an all-time high on Feb. 19, mostly because of worries about President Donald Trump’s tariffs.
Any kind of uncertainty around the economy will give Wall Street pause, but the trade war is making it more difficult for companies, households and others to feel confident enough to invest, spend and make long-term plans.
The tariffs announced on “Liberation Day” sent stocks reeling to their worst day since since the COVID crash of 2020 because they were much harsher than investors had been expecting. They also raised the fear that Trump may push through with them to win long-term gains, such as more manufacturing jobs in the United States.
The hope among investors had been that Trump was using tariffs merely as a bargaining chip to win concessions from other countries. Some big names on Wall Street still think that’s the case, and a moderation of tariffs would help stocks recover, but it’s less of a certainty now.
Should I Sell my Stocks Before a Crash? |Holistic Investment
FAQ
Should I sell my stock before the market crashes?
Selling when the market is down means you might lock in a permanent loss and miss the recovery. The key is to stay in the market for the long haul, not to try and time it. TIP: Be patient, tune out the daily ups and downs of the market and stay focused on your long-term goals.
Should I sell my stocks if a recession is coming?
If you think that a recession is imminent and that the stock market will decline as a result, then it may be wise to sell your stocks.
What is the 7% sell rule?
Should I take my money out of the stock market now?
Investors who sit with discomfort and stick to their long-term equity strategy are more likely to recover and even come out ahead. Those who exit the market too soon, on the other hand, risk locking in losses and losing out on the rebound. Remember, downturns are temporary.