It happens… there is no avoiding it… At one time or another, the Stock Market crashes. BUT – there are steps to take for when you find yourself dealing with a market crash (and even ways to avoid being in the middle of one in the first place). Let me break down the TOP FOUR STEPS to take…
We know that you are not in control of whether a market crashes or not. But the following steps will help put you at ease and allow you some control of at least your finances and investments, even if the crash is happening all around you.
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Let’s break down what a Stock Market crash is and how we know when it happens:
What is a Stock Market crash?
A sudden and rapid drop in stock prices across a broad spectrum of sectors which influences the overall market.
There is no certain amount of how much it falls. An example of a Stock Market crash would be back in 2000 – it fell from 1,500 to 800. “The Market” can be considered the S&P 500 (which is comprised of collection of 500 or so stocks from various sectors that make up the US economy which gives the broadest view of what the economy is like).
Alright now that we have that settled, what should YOU do when the market crashes?
ONE
STAY CALM & DON’T PANIC
That is easy to say when the stock crash is over or when you have nothing invested… but plant that seed now : stay calm and don’t panic. When you get to the other strategies, this will help you attain step one.
I teach people how to read stock charts… and if you were able to see the times when the market has crashed, you will notice that right at the bottom typically you will see people selling their best assets right when it gets ready to turn around and recover.
It typically recovers in about 4 years… for example, in the year 2000 the market was down for 2 years, started to rally in 2003. And then by 2007, it made a 100% return. If you were able to stick it out for 4 years, you would have gotten that money back. Same thing with the crash in 2008 – it fell from about 1,552 and fell to about 705. From 2009 – 2013 it completely recovered. And the rest is history, we have been in a bull market and it almost reached the 3,000 level.
If you panicked at the bottom, in 4 years you missed out on 100% recovery as well as the ability to ride the wave up.
TWO
FIND OUT HOW TO STOP THE BLEEDING
You cannot figure out how to stop the bleeding if you are panicking and selling everything, or if you cannot read a stock chart.
You want to figure out a contingency plan BEFORE it happens BUT if it is already happening, you need to now form a contingency plan.
You may need to ask yourself:
- What type of strategies (I like to call them Insurance Strategies) can I employ to protect myself?
- Can I buy some put options? (Put options will lock in the current value of whatever stock you have and you are guaranteed that rate. As an example: if the stock you have is 90 bucks and you use put options, even if the stock goes up to 300 you are locked in at 90)
- Can I use covered calls? (This means you own stock and you can sell the right to have someone buy it from you at a certain price. As an example: your stock is 100 bucks and you sell the right for someone to buy it from you at $110, and they buy it for $5. If it falls from 100 to 90, they paid you $5 but probably will not exercise the right to have someone buy it at $110. But it lowered your rate to $95 from $100 because you got $5)
As a note, the strategies above cannot unfortunately be used in a 401k account. But an individual account like a Roth IRA, these could be implemented.
This strategies may seem foreign to you, and you may wonder why they aren’t being taught. I thought the same thing! Which is why I started Power Trades University – to get this education out there.
The ironic thing is a lot of times the financial advisors who are licensed can’t talk about it because of all of the red tape they are dealing with. They have to stay neutral on what they talk about. That’s why I like to talk about it – you may start to wonder how you can use these strategies.
THREE
CONSIDER: SHOULD I ADD TO MY POSITIONS?
I know, I know. Some people think I am trippin with this one. I am NOT.
When the market crashes, everyone is panicking and selling off. They aren’t trained to see the opportunity in the chaos. To the trained eye, however, we get so excited in the chaos because that’s when a lot of opportunities present themselves.
So I want you to consider: Should you be adding to your positions?
For example, in the crash between 2000-2002… if I came to you during that time in 2002 and said “Hey, looking at the chart it’s at support and stocks are really cheap – you should start adding money to your positions or start buying stock” you maybe would have thought that I were crazy because the market was down at that time…
Even recently someone emailed us and said “This isn’t a good market to invest in” and I was like… “Are you crazy? This is the BEST market to invest in”.
Here’s why:
When the market is at an all-time high, you do not want to buy because then you think you missed it. When it sells off – it is time to get in. If you don’t get in when it’s good, and don’t get in when its bad – then you never get in!
When the market pulls back, think about how that is the best time to get some great stock at discount. I am not talking about companies going out of business… I am talking about Amazon, Tesla, etc… they are leading the way for the future and you can buy these companies at a discount.
For example, if we think back to the crash in 2008, a lot of people did not want to buy houses right? Because real estate tanked, too. BUT you should have thought – buy as much as you can because people were giving them away! Houses do not go out of style – the real estate market rebounded. People flipped these houses and made huge investment.
They stayed calm, got a strategy and stopped the bleeding, and added to their position.
Then when it was calm and the real estate market rallied, everyone looked back and thought, “I should have bought some houses”. It is the same thing with the stock market.
There has been a recent sell-off and people think this is a bad time to get in – but it is the BEST time.
We have already rallied about 250 points from our 600 point drop!
If you are panicking, you do not see the opportunity. If you did not stop the bleeding, you can’t even fathom adding money. Or if you do not know how the market works – THIS is the time to learn about it and perhaps get started! Ideally, this would be the best time to start to get back in the game if you know how it works.
These crashes and rebounds happen.. there are major points in history where there is a big sell off, but also where it leads to a big rebound.
FOUR
GET EDUCATION & LEARN STRATEGIES
Learn the strategies that are going to protect you when the market crashes – put options, covered calls, etc. These are not things reserved for the “elite”.
For example, when you go buy a car you get a loan. The car may cost $50K but you only have $2K as a down payment, plus the monthly payment.
You are the stock market. The bank put money into you, and they want money back (which is why they have APR or interest). The bank says – how do I protect myself in case they crash the car and total the asset that makes the money? The bank forces you to buy insurance for that reason. The bank has forced you to buy a put option against yourself. If your value goes down to zero and it is a total loss, the insurance claim kicks out a check to the bank. Because they want to be reimbursed for the balance of that car.
How do I reverse this role and how do I become the insurance company? And have someone pay me a percentage every single month? Instead of just being the consumer – driving the depreciating car.
There ARE strategies where YOU become the bank and YOU become the insurance company.
These are four things I want you to think about when the market crashes. But these are things you need to consider NOW before the “bleeding” starts – get the knowledge. Get it first.
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