What would you do when the Market crashes by 30%?

Hey everyone, I often asked myself what I really would do when the market crashes. Of course as a dividend investor there is only one answer buy more share on the dip and averaging down your purchase price to improve your yield on costs. We all know the famous saying “…buy when there is blood on the street”. I also do know that on the long run there is no other alternative than shares. But anyway let’s have a look what a crash could mean to my portfolio and my dividend income.Current Market Situation

Currently the market jumps from one all time high to another one currently the Dow Jones trades at 20 900.98 Points, the S&P at 2 392.24 Points and the DAX at 12 711.06 Points and I think a market correction will come sooner or later, the bull markets takes already more than 8 years. So it is just a matter of time when it will come. By the way I think a market correction is not a bad thing at all as it opens a lot of new investments opportunities.

To keep things easy I will now use the Dow Jones as a benchmark. Let’s have a look to the past, before the financial crisis started the Dow Jones was at 13 930 Points in October 2007 and in February the lowest point of 7 063 Points was reached. That is a decline by more than 49%. For my new scenario I am not assuming such a decline, but I think a correction of around 30% is more than realistic and reasonable. That means the Dow Jones would be at 14 630.69 Points, a level it had about 4 years ago.

What would that Crash mean to my Portfolio?

Currently my portfolio has a value 50 912,13 EUR with a total investment of 47 359.94 EUR. I do have some stocks in there, which gained a lot since I purchased them like Cummins or Altria but I also do have Target in my portfolio which is deeply in red. All in all I am doing fine how things are. My projected yearly dividend income is at 1 352.43 EUR with a current yield of 2.66% and yield on costs of 2.86%.

Again to keep things easy I am assuming my portfolio declines as well by 30% and I am not including any fx-effect. A drop by 30% would mean a decline to a value of 35 638.49 EUR that also means I am at -24.75% with my portfolio performance or in other words I lost more than 11 000 EUR in portfolio value, but luckily I would only loose money if I would sell all my stocks.

What should I do now?

Well first of all you should keep calm most market crashes are emotionally driven, people don’t stop drink Coca Cola because of a market crash and people still buy products of P&G or JNJ etc.. So the fundamentals are most of time not really affected by such a crash and being invested in mostly dividend stocks means the dividend should be safe as well.

What does the crash mean to my dividend yield?

Before the crash my dividend yield was at 2.66% after the crash it is now at 3.80%. Well I think the yield already answers the question what I should do… I have to invest and buy good companies at cheap prices.

If I now would invest 20 000 EUR I could add 760 EUR to my dividend income. That means my total dividend income is now at 2 112.43 EUR with a yield on cost of 3.13% after tax of course and based on a total cost basis of 67 359.94 EUR. As you can see by investing on the dip I could increase my yield on cost from 2.86% to 3.13%.

This example shows quite well how you can take advantage of a market crash, and that the portfolio value is not the most important thing for us dividend income investors. The most important thing is that the dividends are coming in and that the yield on costs goes up by the time.

What should you do in the mean time?

Well even though the market is on a very high level there are still fair valued stocks to find like for example QCOM. As you will never know when the market will crash and as timing the market is impossible you should just keep investing in fairly valued stocks and collect their dividends.

Conclusion

To keep calm during a market crash is always a challenge and even though I have a plan what I should it will be interesting how it will be like as I haven’t had one so far. But yeah let’s see what will happen and to which levels the Dow Jones will further go and how heavy the crash might be. But the important point is to keep calm and to stick to the plan I roughly described above.

What would you do during a crash? Have you already experienced a heavy decline of your portfolio?

I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.

10 Comments

  1. You hit the nail on the head with this topic as I’m starting to feel everything here is a little frothy with valuation levels. I didn’t sell a thing during the last market crash which I am thankful I didn’t. I didn’t however up my contributions as much as I should have. I’m actually hoping for another major correction so I can load up on some more DGI stocks. I look at my net worth and cut it in half for what I may have after a correction as a worst case scenario. It’s why I focus on what my dividend income is and what percent of my life it will support.

    • Hi Duncan,
      thanks for the comment and yes you are right focusing on the dividend income is the most important thing.

  2. You know what they say, “everyone has a plan until they get shot.” It is never more clear than in the market with investors. As soon as crashes hit, everyone forgets their plan. We can only hope that our plans are stronger and more well-built than others and that they were laid to withstand getting “shot”. Thanks for the post and good luck moving forward!

    • Thanks for the comment we can only hope that we can stick to the plan no matter what happens to our portfolio.

  3. I think you summed up pretty much the best strategy that you can do in the given situation.

    Are you worried that not only the valuation gets decreased but as a result a lot of companies will cut their dividends?

    • Well I guess there might be some dividend cuts but the majority of the stocks in my portfolio did not cut their dividend during the last crash.

  4. I like having some cash on the side for when it happens. Also, I go into crazy saving mode to have even more cash to buy more shares. Then, when the market gets back to normal, I do something nice for the family for supporting the effort, especially with the big boost in dividend income. I was able to do that with the correction with oil crashing and the Brexit. Hopefully I can stay strong again.

    • Hi DM,

      thanks for the comment. Yeah some cash on the side is always a good strategy these days. I think Oil and Brexit where not a real crash, just a short correction. I am already curious when the “Trump bubble” crashes.

  5. It depends on the market’s situation. If it’s a bear market, then a 30% decline is just half of the decline. “Buying the dip” will get you killed. If it’s just a significant correction, then that is the perfect opportunity to buy.

    • Hi Troy,
      well it depends from which side you see it, during the last crisis if you have bought on the first 30% dip, in the short term you would have lost money but a year later you were already back in the green zone. It always depends on your strategy… No matter what, you should only invest money you do not need to survive than you will never get killed :).

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