It's only a matter of time. According to The Motley Fool co-founder and CEO Tom Gardner, the stock market declines 1 out of every 3 years. The severity of those pullbacks will vary. The markets will decline 10% about once a year, 20% every four to five years, 30% once a decade, and 40% every 20 years. Since a market crash is inevitable, it only makes sense to begin preparing for the next one now.
On this clip from Motley Fool Live, recorded on Feb. 25, Fool.com contributor Danny Vena shares seven steps that will make the next market crash a little easier to stomach.
Danny Vena: I want to share the seven things that I learned. I will keep them brief so we keep this within a reasonable amount of time.
1. Know yourself
I think the most important thing as an investor is you need to know yourself, know what type of investor you are. Some people are OK with high-risk, high-reward stocks, some are good with growth, some are good with dividends, some are good with value.
Whatever type of investor you are, figure that out for yourself and figure it out as soon as you can; that will help you be prepared for the next downturn.
2. Pay off debt
If you have the opportunity to pay down your debt in advance of the next downturn, do that. Because if you don't have to worry about having to pay credit card debt or other debt when you're in the midst of economic uncertainty, that will really help you sleep at night. It did for me.
3. Have an emergency fund
This goes beyond paying off debt, but put money aside in the savings account or in a CD, so that if there is an unexpected car repair that's needed, if the water heater blows up.
I've got a cousin who lives in Texas, who basically had parts of the ceiling fall in because the pipes broke and water started raining down on the laundry room. That was something that she had to cover right away before the insurance came in. Having an emergency fund will help you deal with the little things in life that can steal your zen.
4. Keep your investing time horizon as long as possible
If you're putting money in the market that you need in this year, or six months, or a year from now, you're setting yourself up for failure. Only invest money that you can leave invested for three to five years from now. That way you won't necessarily need that money, and it won't come up with you thinking, "Oh, my gosh, now I have to sell when stocks are down." That will definitely cause stress.
5. Don't panic sell
If you see everything in the market falling at the same time, that means there's nothing wrong with your individual investments, this is something that's happening across the scope of the market, across the breadth of the market. So do not sell just because you see everything going down. Panic selling is the quickest way to lock in losses.
6. Start to understand the investments that are in your portfolio so that you can recognize when there's a bargain
There are five or six stocks in my portfolio that I know better than any other stocks that I own. When the time comes and stocks are falling, I know when buying, for instance, Netflix, would be a bargain, or when buying The Trade Desk, would be a bargain. That way you can pick up those bargains when the opportunity presents itself.
7. Don't obsess on what the market is doing
One of the things that stole my zen more than I can tell you is staring at the red just dripping off my portfolio day after day after day. You know what? Turn off your computer, step away, go take the dog for a walk, look at a beautiful sunset, read that book you've been wanting to, catch up on that streaming show that you've been dying to watch. The market will still be there tomorrow, and the next day. You don't need to watch it as it tumbles because that will steal your serenity.
Those are the seven things that I learned from the Great Recession that still serve me well today.
