How to hold on for dear life (HODL) during a market crash

In our lifetime, we are likely to experience market crashes and if you are in for the long term - spoiler alert - you will see firsthand more than one. Even though I was still studying at the time, I remember clearly the 2008 one (I had no investments back then) and the Corona market crash made my portfolio lose almost 30% of its value: I was up 11% in early February 2020 and found myself down 18% in March 2020. 


The most important question is - how did if feel? 


If you think that is a weird one to ask, let me explain: I have a fairly ordinary passive investing strategy and I had been following that for a couple of years at the time. What I mean is, did I regret doing that after seeing 30% of my portfolio vanishing? Did I develop the impulse to sell everything and get out? Did I regret not having bonds or other "safer" assets? 


Actually, no. 


I believe the most important success factor in surviving a market crash is to know yourself and what you can and cannot withstand from a psycological point of view. How did you react to the Corona crash? And what did you learn from it about yourself?


At the two extremes, you have a cool-headed investor - the type of guy that maybe checks the portfolio once a month and is completely indifferent whether he or she is gaining or losing - and at the other you have the fidgety investor - the type of guy that checks the portfolio 20 times per day and is always on the verge of tinkering with his strategy based on some short term trends and results. 


Based on the last three years, so far I have been closer to the first type - although I have to admit I check the portfolio multiple times a day. But I have never felt the need to tinker with the strategy. I always save the same amount of money, I transfer it to my investment account, decide what to buy, place an order and check a few hours later if it went through (ok, need to admit that once I tried to be smart and leverage my call margin - if you read about my portfolio, you know how that ended)


What gives me this mindset or attitude towards the investing world? A few ideas of how I see the world and a "fallback".


The fallback is basically having an emergency fund. We talked about it here in the past. Have in your saving account enough money to allow you to cover your expenses for a few months (6 months?), so that you have peace of mind even if you lose your job temporarily. 


Another important idea to understand is the difference between a potential loss and a realized one (the same applies to gains by the way). All the ups and downs I see daily are only potential gains and losses: until I actually sell my asset they are not realized. Therefore, why should I freak out for something that might be completely different in a few months or even weeks from now (assuming I have my back covered by the emergency fund)? 


Last but not least, there is the convinction that if one stays in the market for long enough, then the chances of coming out at a loss are extremely small. In the last decades, there have been several crashes and recessions - but if you endured for long enough, you would end up still on the positive side. 

As an example of what I mean, let´s consider the Dot.com bubble of the early 2000 - below you can see the evolution of the Nasdaq index over time. The peak happened in March 2000 and it took until April 2015 to recover its nominal value (not the real one, as we are not accounting for inflation). 

15 years sounds like a long time - and in certain contexts - it is, but in the framework of passive investing that is a relatively short timeframe!

One could ask, what about Japan´s lost decade? There the Nikkei 225 has not yet reached the peak of the 90ies. Yes - fully correct and on point - but that is a diversification problem in my opinion. You need to diversify your exposure beyond a country (e.g. Japan) or an index (e.g. Nasdaq) in any case. 


That said, this might not be enough for you - and I fully understand that! If you think you will not resist the urge to tinker around during a crash because the (potential) losses are too big to bear, think about the following:

  • If you have not done it already, diversify your equity position as much as you can. Here you can find some tips on how to create a worldwide portfolio in easy ways. 
  • Diversify beyond equity and include other assets in your portfolio. On this, here you can read more.

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