3 Things You Shouldn’t Do if the Stock Market Crashes

We all make mistakes. It’s part of the human experience. The best you can do is learn from them and try not to make them in the future. Some are even able to learn from others’ mistakes. But it’s rare. As anyone with teenage kids — or who remembers being a teenager themselves — know…

you can share what you’ve learned but people typically have to make mistakes for themselves to get the message.

With that caveat, I’ll share three things that you absolutely should not do if the stock market crashes. These lessons have proven true over time. But like most people, I had to learn them myself over the last quarter century of investing. Hopefully, you can learn from my mistakes.

1. Don’t ignore the business

When you own a small portion of a business — that’s what shares are — it’s easy to get distracted by the stock price. After all, we don’t have much more to judge the company by until the next quarterly earnings report. But that isn’t what the company’s employees are paying attention to. They are focused on the processes and metrics that indicate how happy customers are, how productive teams are, and how money is flowing through the business.

That’s why it’s important to stay focused on the real world if the stock market crashes. Go visit a company location if you can. Are there fewer customers? Is the staff concerned? Does it look like it is worth less than the last time you visited?

Good examples from the recent pandemic-induced crash are Microsoft (NASDAQ:MSFT) and AMC Entertainment (NYSE:AMC). While both saw their stock prices drop precipitously in the spring of 2020, the businesses were performing much differently.

2. Don’t panic sell

In investing, emotions play an outsized role. And they are our worst enemy. Although there have been questions about whether the study actually exists, Fidelity supposedly found that its most successful customers were either dead or had forgotten they had an account. A study from the University of California, Davis and the University of California, Berkeley found that trading reduced investors’ returns. That underperformance was attributed to costs — an expense that (mostly) no longer exists for current investors.

Still, emotion can lead to poor outcomes. Warren Buffett‘s famous quote from the 1986 Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholder letter turns the risk of reacting the way everyone else does on its head:…

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