The Stock Market Crash Survival Guide

It is said that a pin lies in wait for every stock market bubble. Put differently, there's barely any bubble that does not burst eventually.

What isn't clear however is the nature of the pin and the exact moment the pin jabs the bubble.

A lot of experts around the world are of the view that the stock market bubble that kept getting bigger and bigger post the onset of the Coronavirus pandemic, has finally found its pin.

In fact, there are 3 pins that are competing against each other right now.

The first one is the US recession. US stock fell sharply last weekend on the back of a weaker than anticipated jobs report for July. This has triggered concerns about a recession in the country.

The second pin is the fear of an escalation in the conflict in the middle east. The assassination of one of Hamas' top men has brought matters there to a boil.

And last but not the least pin is the so-called unwinding of the Yen trade. You see, Japanese Yen was a very cheap source of money until now as interest rates in Japan were almost zero.

So, borrowing in yen and deploying the capital across the globe in high-return asset classes like equities, was indeed a very lucrative trade.

However, with the central bank of Japan raising rates by 0.25% and giving a very hawkish commentary about future rate increases, markets have turned jittery and are falling like nine-pins, especially the Japanese market, which suffered its worst one-day loss in history.

So, there you are, 3 pins, each of which having the potential to either single handedly burst the bubble or even do it in unison.

Also, while a lot of investors might think that India has de-coupled from the rest of the world due to low reliance on FIIs as well as exports, this may not be entirely true.

Please note that we still run a trade deficit and we still need dollars to close the gap between our higher imports and lower exports.

Also, our economy is still susceptible to higher oil prices and hence, any trouble globally will affect us here in India as well.

Little wonder then as stock markets from US to Japan are tanking, Indian stocks aren't doing great either.

While most of the benchmark indices fell with small and midcaps falling more than their large cap counterparts, we won't be surprised if there is more damage in store in the coming days.

So, please prepare yourselves for a rough ride ahead.

Talking of rides, how should one ride the current uncertainty that has gripped stock markets worldwide? Should one not take any action at all, or should one sell everything and run to the hills now that a big stock market crash is coming?

Well, you should do what the lady in the image below seems to be doing after her vehicle has broken down in the middle of nowhere.

Yes, that's correct. This lady's caravan has broken down and instead of panicking, she's calmness personified, relaxing and enjoying the beautiful weather outside.

The reason she is not panicking is because she has prepared a plan for emergencies of this kind in advance.

She knows that breakdowns are common and hence, has listed out the steps she will take to ensure her safety.

Steps like having enough water and food to last a couple of days, emergency numbers like those of a truck towing company, police etc saved on her phone and awareness of the fact that there will always be fellow travellers who would be taking the same route and would therefore stop to help her.

Thus, having prepared the plan and also set it in motion, she can afford to relax and take it easy.

To be honest, the lady's situation is not different than someone facing a stock market crash. Even there, you have the option of either panicking and taking a rash decision or preparing a plan well in advance.

Preparing a plan in advance will keep you relaxed and calm. It will not only take you to safety but also keep you on track in our long-term wealth creation journey.

So, do you have a plan ready? Well, let me tell you mine.

You see, my goal is to beat the benchmark index by at least 5% per annum over the long term. And hence, I have prepared a plan keeping in mind this long-term objective.

If one has Rs 100, I recommend that an investor have Rs 25 each in stocks and bonds or fixed deposits. And this is the bare minimum that one should have in each asset class. One should not go lower than this limit of Rs 25 or 25% in each of these asset classes at any point in time.

The remaining Rs 50 or 50% should again be invested in either of these asset classes based on the broader stock market valuation.

If the broader stock market is attractively valued and there are a lot of stocks that are available at attractive valuations then the entire Rs 50 can be invested in stocks, which will bring the allocation to 75:25 in favour of stocks.

Likewise, if the broader market is quite expensive and not many stocks are available at attractive valuations, one can have as much as 75% in bonds or fixed deposits and only 25% in stocks.

If one is not comfortable having only 25% in stocks, one can even be 50:50 in each asset class. Let me repeat this plan.

• 25% in stocks and bonds/fixed deposits at all times.
• If market is attractively valued, share of stocks can go to as high as 75%.
• If market is expensive, share of stocks can only be 25%.
• One can also be 50:50 if not comfortable with only 25% in stocks.
• You should assess the allocation once every year and consider fresh allocation for the next year.

Will this plan guarantee success? Well, there is no plan that can guarantee success in the stock market.

However, what this plan does is it allows you to put more money into stocks when markets are cheap and compels you to take money out of stocks when they turn expensive.

Thus, it allows you to buy low and sell high and this is the right thing to do from a long-term perspective.

As far as buying individual stocks are concerned, a portfolio of 20-30 stocks is a good idea provided all the stocks pass the test of having sound fundamentals and reasonable valuations.

Thus, in conclusion, while the threats to a stock market crash is real, no one can predict the exact timing of the same. Hence, it is always better to not panic and have a plan in advance.

While there are no plans that can guarantee you success, my plan of having at least 25% in stocks and bonds at all times and toggling between the same two asset classes for the remaining 50% seems good.

This plan has the advantage of being logical, simple to implement and a good long term track record.

There is a possibility that you may not agree with this plan which is perfectly fine. You can certainly have a plan of your own.

But do ensure that it is simple to execute and allows you to buy low and sell high and not the other way round.

Any plan that forces to buy near a market top and sell near the bottom is just bad. So, be extra careful.

Happy investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)