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It takes a cool head to prosper during a market crash.
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The U.S. has weathered several big stock market crashes. Although the market has rebounded each time, a crash leaves plenty of people in its wake. For example, many investors lost everything on Oct. 29, 1929, when the New York Stock Exchange crashed.
In the shadow of that crash, the U.S. and the rest of the industrialized world fell into the Great Depression. People feared for their jobs and wondered where they would find the money to pay bills. Consumers cut back on big-ticket items typically bought on credit. Due to the cutbacks in spending, large companies slowed production and furloughed workers. Suddenly, those fears of job loss became a reality.
And yet, through each market crash, there have been those who have prospered. While others panic, they remember that the market has historically roared back after each crash. In anticipation of a time when the market feels bullish again, they take the opportunity to fatten their portfolios.
Getting rich when others lose hope
The oil baron J. Paul Getty received an inheritance of $500,000 in 1930, shortly after the crash. Rather than sit on the money, Getty got busy. Seeing that the price of oil stocks had hit rock bottom, he snatched them up at a bargain basement price. The result? When the market rebounded, Getty was a rich man, thanks to his action when the economy appeared to be at its worst.
The same thing happened to people like Warren Buffett, Jamie Dimon, and Carl Icahn during the Great Recession of 2008. Each zigged when the rest of the world zagged. Rather than run around like their hair was on fire, they each made a conscious decision to buy while prices were low.
The thing about those who get rich when the market crashes is this: There’s nothing magical about the steps they take to position themselves. The next time the market crashes — or even takes a dramatic dip – you, too, can take advantage of the situation.
Characteristics of money-makers
While those who become rich by investing money each have their own story to tell, they share specific characteristics.
They pay attention
Crashes rarely come out of left field for those who watch the market. It was no surprise to those in the know when the dot-com bubble burst in the early 2000s. The value of tech stock climbed so dramatically in such a short period of time that some recognized it for what it was — an unsustainable bubble.
That’s not to say that anyone has the gift of predicting what the market will do with 100% accuracy, but those who pay attention learn to spot patterns. It’s okay to be suspicious of anything that seems too good to be true.
Once the bubble burst, they took advantage of low prices to buy stock in companies they believed would recover.
They hold tight
Many investors will panic and sell during a financial crisis, ultimately regretting the decision when the value of their previous holdings rebounds. To find an example, we need only look back to spring 2020. Over a short period, the S&P 500 dropped by over 30%. By early summer, it was already clear that the market losses associated with COVID-19 were just a blip on the radar screen. By the end of 2020, those who sold had missed out on 65% gains from the bottom of the crash.
If you believe in your investment strategy and have faith in your choices, you must be willing to ride out the crashes. Trying to time the market is likely to cost you money.
They’re picky buyers
Looking back at the Great Recession of 2008, we can see that the investors who wound up with the fattest portfolios were picky about the bargains they bought. It’s all about quality over quantity.
The goal is not to buy the cheapest stocks or the stocks that fall the most. The goal is to buy the highest-quality stocks you can find at the best prices available.
They plan ahead
Bear markets do not tend to last long. The average length of a bear market is approximately 9.6 months. However, the average bull market lasts for 2.7 years. While that’s good news for the economy, it also means you have less time to enhance your portfolio by scooping up low-price quality stocks.
Let’s say you spend 50 years of your life investing. You can expect to experience approximately 14 bear markets. You want to be ready for the next bear market or market crash by having enough money put away to take advantage of low prices.
Since there are no guarantees in life, the best any of us can do is learn from history, and history shows there is a certain type of investor who is determined to come out ahead, no matter what befalls the stock market.
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