How To Survive a Stock Market Collapse

On Monday, August 5th, investors woke up to a global financial market crisis. Japan's Nikkei 225 stock market index fell 12%, the worst day for the index in 37 years.

In the United States, stocks were also in free fall, with the Dow Jones Industrial Average plummeting 1,060 points, a 2.7% loss in value. The technology-heavy Nasdaq slid by 6%, and the big-brand S&P 500 fell by 4.2%.

Big corporate names weren't spared. Nvidia (NVDA), Apple (AAPL), and Tesla (TSLA) saw their shares fall significantly. Nvidia shares dropped 9.6%, Apple dipped 5%, and Tesla lost 10% during the day's trading. Simultaneously, Bitcoin, which the cryptocurrency crows have heralded as a backstop against a big market crash, finished up 1.96% on the same day.

Those are all big numbers, and the news spread fears of a global recession, fueled by a lackluster July U.S. employment report, inactivity by the Federal Reserve to address a souring economy, Japan boosting interest rates, and weakening company earnings reports.

"The U.S. is the locomotive of the global economic train, and increasing concern about a slowdown, or possible recession, has markets worldwide in turmoil," says Greg McBride, Bankrate's chief financial analyst. "While the most recent employment report was disappointing, it wasn't the only worrisome economic indicator, only the latest. Couple economic concerns with company earnings disappointments, weak corporate outlooks, global unrest, and currency gyrations, and you have the recipe for sudden volatility."

McBride suggests the market downturn could be temporary and that sudden stalls are something investors should expect.

"Individual investors should be reminded that market volatility is common and a 10% pullback tends to happen, on average, every 12 months or so," he notes. "Investing for the long-term means embracing these periods of turbulence, either to buy more or to just shrug it off and maintain the long-term perspective."

If Market Events Grow Worse, Investors Have Options

Whether the global stock market dip is short-lived or gets worse over the next few weeks and months, it's always a good idea for regular investors to have a plan in place for sudden market changes, like the one on August 5th.

"Investors should design a portfolio that accounts for the inevitability of market declines and recessions," says Mark J. Higgins, a certified financial planner based in Portland, Oregon. "People almost always fear recessions and market crashes because they lack awareness that they occur much more frequently than assumed."

Market fluctuations are natural parts of economic cycles -- and in many cases, they are necessary and healthy. "As long as you build a portfolio that recognizes that such events occur but will end, there is no need to take additional (and often costly steps) to try to 'crash-proof' your portfolio," Higgins says.

Build that bullet-proof portfolio using these investment action steps.

Study Financial History Like It's Your Job

If you supplement your personal experiences with money management knowledge, there shouldn't be any big stock market surprises going forward.

"John Kenneth Galbraith once said that for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years," Higgins says. "But, for most investors, I think two to five years is a better estimate."

Higgins continues, "too many investors are impulsive and falsely assume that every panic is the end of the world. But if they extend their knowledge back for many decades, even centuries, they'll respond to market dives with wisdom and a steady hand as they'll have seen many panics, depressions, wars, and other financial crises from start to finish."

Steady as She Goes

While investors may be understandably nervous with worldwide markets roiling, now is the time to keep calm and carry on.

"If you have a long-term time horizon, then stay the course," advises Robert R. Johnson, a financial advisor and professor of finance at Heider College of Business at Creighton University. "If you don't have a long-term time horizon, you shouldn't be invested in the stock market in the first place."

Johnson says one of the biggest mistakes investors make is trying to time the market. After all, it's easy to be guided by the 24/7 financial news services that say the key to investment success is timing the markets (i.e., getting out of stocks before a decline and getting back into stocks before a stock rally). "Nothing could be further from the truth," he notes.

Vanguard founder Jack Bogle is quoted as saying, "After nearly 50 years in this business, I do not know of anybody who has done market timing successfully and consistently. I don't even know of anybody who knows anybody who has done it successfully and consistently."

Ride It Out With the Calendar in Mind

"Historically, the third quarter is the worst performing quarter for stocks, and added to all of the economic woes rising, it could portend a tough next few months, especially with the uncertainty of the upcoming November elections," explains Rod Skyles, a market analyst at The Unconventional Economist, a stock market analytical platform. "Still, there has been little sign that this historic market run has met its limit."

This particular market decline requires some context, as it points to long-term issues within the U.S. stock market.

"If you drop the top-performing few stocks from the S&P 500, especially Nvidia, the performance of the majority has significantly underperformed the index, and nearly 40% of the 500 stocks in the index are down year to date in 2024," Sykes adds.

Short-term investors might consider taking some profits now, while longer-term investors should remember that timing the market is difficult, and the overall trend is still upward. "That could change quickly, but unless one is risk averse, having some patience to see how things play out might be the best current course for most investors," he advises.

Watch the Major Stock Indexes Closely

Another smart move is to watch the breadth of an index, like the S&P 500, which shows how many stocks are up versus down.

"If there is a switch from the majority of the stocks in the index going from down to up or up to down, it might be an indicator there is going to be a significant change in the market," Skyles says.

Skyles also closely tracks the stock market's 200-day moving average (e.g., a long-term stock market trend indicator that helps investors gauge market performance). "If stocks break below that line for more than a few days, it may be a sign to begin to sell, and conversely, if stocks break above that average for a period of time, it may be time to buy."

If events like the August 6 stock market selloff have spooked you, it's okay to store any new investment money in safer options. "Right now, stocks seem very expensive in general, and both stocks and especially longer bonds appear quite risky," Sykes says. "It might be best just to buy short-term treasuries and see how things play out over the next few months."

Build a Crash-Proof Stock Market Portfolio

The biggest mistake an investor can make is having a portfolio that doesn't account for how they'll respond in a crisis.

"If you react by selling during a crash, you can seriously impair their long-term objectives," Higgins adds. "The best defense is to understand that such events are common and that they will pass. As long as investors have enough liquidity to weather the event, they should use it as an opportunity to rebalance rather than flee in terror."

Keeping calm is the number one piece of advice market mavens offer Main Street investors, and this latest marker scare is no different.

"If you want stability, the stock market is not for you," says Paul Gabrail, founder and host of Everything Money, a digital money management advice platform. "As a stock investor, you're being paid a premium for volatility. If you want stability, 90-day treasuries still pay over 5%."

What matters most in the stock market is focusing on the long-term and today's valuations compared to the price.

"10,000,000 things can and likely will go wrong in the next 40 years, however, stocks will likely continue to go up," Gabrail says. "Why? Because the U.S. economy gets better. Consequently, the best time to buy is when stocks are lowest and when there tends to be the most fear."

Meanwhile, stay the course in stable stocks and low-cost Exchange Traded Funds (ETFs) and think about your retirement in times of market peril. "Look at history and the biggest crashes," Gabrail advises. "Do you wish you had invested during those crashes? The answer is typically a resounding 'yes.' In this snapshot in time, this market selloff should be no different."