How to avoid losing money during market crashes?

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

──────────────────

The market will only crash when something unexpected and bad happens.

If the bad news is expected, the market would have priced it in. But if it is unexpected, the market will react with a sudden sell-off.

Prices will remain depressed as long as the market is not convinced that the worst is over.

Once the market is convinced the worst is over, markets will rebound and rally.

As investors, we want to get in before the majority. Staying ahead of the masses is critical to achieving above average returns. And we can do that in 2 ways:

1. Stay invested

2. Invest in panic

By staying invested, you are way ahead of those who are either not invested or have yet to invest.

By investing in panic, you are doing what the majority isn't, and that will deliver above average returns, assuming you invest in the market index which mitigates any firm-specific risk or uncertainty.

Investing during panic means you are unlikely to be buying at pricey valuations but are likely to get good bargains. Everyone likes good bargains but no one likes bargains when there is fear and panic everywhere. People resort to safe haven assets like cash and bonds during panic. It is during such times that the greatest buying opportunities are presented. Taking advantage of the fear and irrationality of Mr. Market during times of panic will yield rich returns in the long-term.

When you invest in panic, you are staying ahead of the majority by accumulating positions in assets and companies at heavily discounted valuations. In the long term, it will be difficult to lose money if you invest in assets at below fair valuation.

However, it is easier said than done. For this reason, markets capitulate when everyone is selling and no one is buying. This is when the market bottoms and rebounds.

The market will not rebound unless the market is convinced that the worst is over. And the only way for that to happen is for the panic to be over. If the panic still lingers, the market will remain undervalued and thus continue to offer attractive bargain buys.

But how do we differentiate between bargain buys and lousy or even un-investable assets?

Firstly, there's no such thing as an un-investable asset. Every asset is investable at the right price. Some assets (or rather liabilities) may have a negative price where the owner pays you to acquire them (e.g. insolvent companies where liabilities exceed assets), while majority of assets require you to pay the owner to buy over the asset.

In short, all assets are investable at the right price.

Secondly, there is no clear cut way to differentiate between a bargain buy and a lousy asset. If there was, everyone would make money easily and no one would be losing money.

Why then do people still lose money? It is primarily due to either fear or greed. 

Fear can result in two outcomes: panic buying at overvaluations or panic selling at undervaluations. Greed can result in two outcomes: greed buying at overvaluations or greed selling at undervaluations.

To sum it up:

1. Panic buying is due to the fear of missing out

2. Panic selling is due to the fear of losing

3. Greed buying is due to speculation

4. Greed selling is due to profit-taking

The first three result in losses, while the last results in lost profits. Losses are definitely worse than lost profit. So the first three have a greater impact.

How do we avoid them?

For panic, it is simple: do nothing during panic. How do we tell when there is panic? Either when everyone around you is panicking or when you are panicking. So, the simplest thing to do to avoid losses is doing nothing.

But if you wish to profit from the panic, you need to act on the panic by doing the opposite of what everyone is doing or what you feel like doing (i.e. selling because of fear). If you are able to comfortably do nothing during times of panic, you can consider profiting from the panic.

But if you find it impossible to do nothing during panic, it is best is to stay away from the markets during panics and just ride it through especially if you are already invested.

Psychologically, if you are unable to take it, doing nothing during market crashes and panic is the best thing you can do to protect both you and your portfolio.

For the third point on greed buying (speculating), the best way to avoid this is to consistently buy regardless of the market condition. Automating your buying will allow you to spread out your capital instead of going all in at once, which may result in you buying out of greed or speculation. Automating your buying is the best way to avoid buying out of greed.

And lastly, the best way to avoid greed selling is to simply never sell. But never selling can is both good and bad. 

The Good

If what you're investing in is a diversified index, never selling applies to you as there's no point selling an index, since most indexes are self-cleansing.

The Bad

But if what you're buying are individual stocks, you will need to rebalance periodically to weed out underperforming stocks and switch to better ones. In this case, never selling doesn't apply to you unless you are holding exceptional companies which can deliver exceptional returns over the long-term.

Conclusion

In short, if you're buying an index, there is no need for for you buy and sell stocks to rebalance your portfolio. Instead, you can buy and hold forever. And that's probably the best investment decision most of us can make.

"Our favourite holding period is forever." — Warren Buffett

──────────────────

Disclaimer:

The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

No copyright infringement intended. The images used in this blog are solely for educational and informative purposes, and are © copyrighted by their respective owners.

Copyright © 2025. All rights reserved. SN Finance Blog