Nobody can predict the short-term direction of the stock market, and it is not something we would attempt.

Still, we can be confident that the stock market will crash again at some point in the future.  For those of us in our 30s and 40s, we are all but certain to experience several more crashes in our lifetimes.

Knowing that they are coming, but not knowing when, requires us to prepare in advance.

Acknowledging how we might feel during the next crash is a useful first step.  Doing so during a period of market serenity (when we can ponder the topic intellectually) can lessen the anxiety during sharp downturns (when our unhelpful animal instincts kick in).

With that goal in mind, prepare to experience one or more of the following inner monologues:

• “I know that markets have always rebounded in the past, but this time really does feel different. The world has changed forever as the result of <insert whatever triggered the crash>.”
• “My portfolio declined by more last week/month/quarter/ year than I made last <insert longer time period>.  I worked really hard for that money.  Am I crazy to be doing this?”
• “If markets continue to go down at this rate, I will eventually lose everything.”
• “The pain from these losses is much stronger than any joy I felt when the market was going up.”
• “I had these same thoughts last week/month/quarter/year. If I had only acted on them then, I wouldn’t have continued to lose so much money.  I don’t want to make that same mistake again.”
• “I’ll continue buying stocks through my regular 401(k) contributions, but I won’t do so with my real money.”
• “I’m just going to move my money to the sidelines until things settle down.”

I personally experienced every one of those understandable-but-ultimately-counterproductive thoughts during the 2008-2009 crash, and I’d like to think that acknowledging them will allow me to recognize and more easily ignore them the next time around.

Whether or not we like to admit it, each of those thoughts push us towards “market timing,” or attempting to participate in market increases while sidestepping the downturns.  While this sounds great in theory, it’s very difficult in practice.  Successfully timing the market requires not only knowing when to get out, but when to get back in – investors on the sidelines for the last crash missed out on sizable gains during the 2009 rebound.  Would-be market timers consistently underperform broad indices over the long-term and are assured only of increased trading costs (and likely a bigger tax bill).

Beyond mentally steeling ourselves ahead of market crashes, there are two very tangible steps we can take to prepare:

1. Develop and sign a written investment plan. Creating a thoughtful investment plan that details every aspect of your investment methodology (target asset allocation, rebalancing triggers, tax loss harvesting rules, etc.) creates a map to follow in good times and bad.  The most important aspect of this plan will be selecting a target asset allocation that you can stick to even in the depths of a crash.
2. Find someone to hold you accountable to that plan. While a written investment plan is powerful, it only works if you follow it with discipline.  Doing so can be very difficult when your brain starts to play tricks on you.  Having a third party who knows the plan and will hold you accountable is critical.  Ideally, that person will not be your spouse or anyone directly affected by your investment decisions, as they will be subject to the same biases.  We are of course supportive of you hiring a good advisor, but even enlisting a trusted friend who is up to the task would be very valuable.

Crashes are a feature of markets, not a bug; they partially explain why the long-term expected return on stocks is so high, as investors need to be richly compensated for the often bumpy ride.   And for those of us fortunate enough to have a majority of our saving and investing ahead of us, remember that market corrections are typically beneficial as they offer opportunities to buy stocks at a discount from today’s prices.

Whether it occurs in a week or a decade, the next market crash will inevitably be painful.  Preparing yourself in advance can make all the difference.