If you are a long-term investor, you will face a stock market crash at some point. The most recent example was the 2020 coronavirus market crash.
However, there is a silver lining to this dark cloud. As a long-term investor, you will also benefit from bull markets that lift your portfolio. This means that throughout your investing journey, there will be plenty of opportunities to recover from market crash losses.
To minimize losses and maximize gains, it’s crucial to make wise decisions during difficult times. Here are three things you should never do when the market crashes.
1. Focusing on the Short Term
When indexes drop double digits over a few days and your favorite stocks follow suit, it’s difficult to avoid short-term thinking. It’s easy to panic over paper losses. Instead, you should double down on a long-term mindset.
Consider how certain top stocks that are currently declining have actually performed over time. Take Amazon (NASDAQ: AMZN) as an example. During the coronavirus market crash, Amazon’s stock lost more than 15% in just a few weeks. However, over the past 10 years, Amazon stock has surged by more than 500%.
Looking at stock performance from a long-term perspective makes it easier to stay calm in a tough market. Short-term losses are unlikely to have a significant impact on your investment value over time.
If you base your investment decisions solely on how stocks perform during a market crash, you might end up making bad choices that you’ll regret when the market rebounds.
2. Watching Stock Performance Instead of Earnings
While you shouldn’t completely ignore earnings reports during a market crash, focusing too much on how stocks are performing can lead to missing key aspects of a company’s financials.
Let’s use an example from a bear market—Costco (NASDAQ: COST). Last year, its stock dropped 19%. However, during the same period, its earnings continued to grow.
If you take a closer look at Costco’s earnings reports and business model, you’ll see that it’s a great stock to own even in tough economic times. It offers rock-bottom prices on essential goods, which is exactly what customers look for in a weak economy. Additionally, its membership-based business model ensures that shoppers keep coming back—they’ve paid an annual fee, so they want to get their money’s worth.
During a market crash, don’t focus solely on stock prices. Instead, check the company’s recent earnings reports. Can the company continue to grow earnings despite tough conditions? Is management taking the right steps to navigate challenges? Most importantly, does the company’s future outlook remain strong?
Even if earnings decline in the short term, positive answers to these questions may justify holding onto your stocks.
3. Prioritizing Selling Over Buying
At some point, you may consider selling stocks in companies you no longer believe in or stocks that you think have reached their full potential. However, in general, a market crash is not the best time to sell—it could mean selling at a loss.
You may feel tempted to sell simply because stock prices are dropping. Fear might make you think that if you don’t exit now, you’ll lose even more money. And it’s true that over the next few weeks or months, you could see further paper losses.
However, stocks that you’re about to sell might eventually recover and deliver outstanding performance. The Amazon example applies here as well. In most cases, the best approach is to wait for market conditions to improve before making any selling decisions.
Meanwhile, don’t be afraid to buy. During a crash, some of the best companies may trade at dirt-cheap valuations because so many investors are selling. Billionaire investor Warren Buffett famously said, “Be greedy only when others are fearful.” Buffett is known for buying stocks when valuations are depressed.
Thus, a market crash presents a great opportunity to assess a company’s financial strength and long-term potential. If everything checks out, don’t hesitate to jump into the market with confidence.
