What I Plan to Do When the Market Crashes

One of the most common questions financial TV hosts ask their guests is whether they expect a pullback or a crash to hit the market. It's an odd question, akin to asking whether they expect summer to occur. Of course summer will occur, and of course stocks will pull back. Since 1928, the S&P 500 (SNPINDEX: ^GSPC  ) has declined 10% or more from a recent high 89 times, or about once every 11 months, with just a handful of years escaping a 10% dip. Ten-percent pullbacks are almost as common as summers. Twenty-percent market drops have occurred 21 times since 1928, or about as often as presidential elections.

But investing is emotional and the allure of money makes us delusional, so we train ourselves to both think the market doesn't (or shouldn't) crash from time to time, and panic when it does. Few of us are immune to this, as the number of investors who claiming to be contrarians outnumber actual contrarians by orders of magnitude.

When you become resigned to the frequency of market crashes (and our tendency to panic when they hit), having an investment plan based on strict rules makes way more sense than flying by the seat of your pants and hoping you act rationally when everyone else doesn't.

So I put together a plan to guide how I invest when the market crashes next.

Say I have $1,000 cash set aside to invest (in addition to an emergency fund). It's opportunistic money. Here's my roadmap for deploying it:

These rules apply to the portion of my portfolio that invests in broad-based stock index funds, since opportunities in specific companies and sectors vary in unpredictable ways during each crash. (more)
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