Corrections and Crashes — Turning Fear Into Long-Term Opportunity

In Episode 21, we explore the realities of market corrections and crashes, explaining what they are, why they happen, and how investor psychology often turns them into bigger problems than they need to be. The episode outlines practical steps to prepare before a downturn, including knowing your risk tolerance, maintaining a cash buffer, and creating a buy list of quality assets.

Listeners learn how to survive market turbulence through disciplined rebalancing, continued contributions, and focusing on controllable factors. Real-world examples illustrate how past crashes have created huge opportunities for patient, prepared investors.

The takeaway is clear: downturns are not interruptions to wealth building — they are essential moments to act with discipline and build lasting gains.

Episode Transcript

Speaker 1 (00:00):
As always before we begin, this podcast is for informational
and educational purposes only. It is not financial advice. Always
do your own research and consult with a licensed advisor
before making any investment decisions. Welcome back to the Smarter
Money Show. I'm your host, and this is episode twenty one.
Today we're talking about something that makes most investors nervous,

(00:20):
but it doesn't have to market corrections and crashes. If
you've been investing for more than a few years, you've
already experienced them. If you're new to the game, you
will guaranteed. And here's the thing, how you handle corrections
and crashes will do more to determine your long term
success than any stock pick etf choice, or hot tip
you ever get. In this episode, we'll cover what exactly

(00:43):
a correction and a crash are, why they happen, the
psychology behind them, practical steps to prepare before they hit,
how to survive when you're in the middle of one,
and most importantly, how to use them to your advantage.
Understanding corrections versus crashes. A market correction is typically defined
as a drop of ten percent or more from a

(01:04):
recent peak in a major index like the S and
P five hundred. These are common. Historically, we see them
about once every one two years. They usually last a
few weeks to a few months, and in most cases
the market recovers relatively quickly. You might barely remember some
of them unless you are watching your portfolio daily. A
market crash, on the other hand, is more severe, usually

(01:27):
a drop of twenty percent or more in a short time,
often accompanied by panic selling, margin calls, and widespread fear.
Crashes can be part of a bear market, which might
last months or years. Think two thousand and eight during
the financial crisis, twenty twenty at the start of the pandemic,
or the infamous crash of nineteen eighty seven when the
Dow dropped over twenty two percent in a single day.

(01:49):
Corrections are not assigned the market's broken. They are a
pressure valve. They reset over extended prices, shake out excessive speculation,
and bring valuations back to more reasonable levels. Without them,
bubbles expand until they explode, and that's far more damaging.
Why they happen. There's never just one reason. Corrections and

(02:10):
crashes can be triggered by macroeconomic shifts, rising inflation, central
banks raising rates, or GDP slowing geopolitical events, wars, political instability,
trade disputes, pandemics, corporate events, major bankruptcies, accounting scandals, earnings disasters,
market sentiment. Investors get two euphoric prices run ahead of fundamentals,

(02:32):
and a small shock sparks selling, which then feeds on itself.
The truth is you can't predict the exact trigger. That's
why the reaction matters more than the reason. The psychology
of market drops. Uptrends breed over confidence. People take on
margin by speculative assets and believe this time is different.

(02:53):
Downturns flip the switch to fear. That same overconfidence turns
into paralysis or panic selling. Behavioral finance studies show most
investors underperform the very funds they invest in simply because
they buy high in euphoria and sell low in fear.
Missing even the ten best days in the market over
a twenty year period can cut your returns in half,

(03:14):
and those best days often come right after the worst ones.
Your edge is not predicting the future, it's avoiding emotional
mistakes when everyone else is making them. Preparing before the storm,
one know your real risk tolerance. If a twenty percent
drop would cause you to sell everything You're too aggressive.
Better to adjust now than in a panic. Two keep

(03:36):
a cash buffer. This isn't market timing, it's insurance. It
keeps you from selling at the worst time and lets
you buy at a discount when everyone else is scared.
Three diversify for real across asset classes and regions US
large caps, international equities, bonds, maybe a touch of commodities
or riya ets. Real diversifications smooths the ride. Four make

(03:59):
your buy lilt in advance. Write down quality companies or
ETFs you'd love to own at a twenty thirty percent
discount when prices fall. Act from the list, not from
your emotions. Five automate where possible, Set calendar reminders to
review allocations. Use automatic contributions so you're buying on schedule,
not on mood. Surviving during a downturn. Don't pan excel

(04:23):
if you own quality. Temporary price drops are noise, not signals.
Control what you can your savings rate, your expenses, and
your allocations are in your hands. Macro headlines are not
Keep contributing dollar cost averaging in a bear market is
how you buy low without thinking about it. Use rebalancing
if stocks are down and bonds are stable, sell some

(04:44):
bonds and buy stocks. This makes you systematically buy low
and sell high without guessing bottoms. Real world example portfolio
one hundred thousand dollars split sixty percent stocks, forty percent bonds,
Stocks drop twenty five percent, bonds flat. Allocation shifts to
fifty fiftieths. You sell ten thousand dollars in bonds, buy stocks,

(05:06):
restoring sixty fortieths. No crystal ball, just a plan executed
opportunity in chaos. Every crisis leaves bargains in its wake.
Two thousand and nine, Apple under fifteen dollars split adjusted
twenty twenty, Microsoft down till to thirty percent, Disney till
to forty percent, off highs twenty twenty two. Dividend aristocrats

(05:28):
at multi year lows. The trick focus on businesses with
strong balance sheets, durable advantages, and real cash flow or
broad ETFs, holding many of them avoiding permanent loss. Not
every stock recovers. Companies with high debt, declining markets, or
bad management can be wiped out. Avoid chasing the cheap
names without real due diligence. Strengthening your emotional game. The

(05:54):
best investors aren't fearless, they're prepared. They have rules, checklists,
and processes. Expect volatility and see it as opportunity. Use
visual reminders like charts showing past crashes and recoveries to
keep perspective. A thirty percent drop looks devastating up close,
but tiny on a fifty year chart. Your four step
crash plan, review and align your allocation with your risk tolerance.

(06:19):
Maintain a six twelvemonth cash buffer. Prepare your BYLST early
rebalance on schedule. No matter the headlines, final mindset shift
corrections and crashes are not interruptions to your wealth building journey.
They are the journey. They're where the biggest long term
gains are made if you stay disciplined. Remember, every crash

(06:39):
in history has been followed by new highs. The only
ones left behind are those who exited and never came back.
And just to be clear, this is not financial advice.
This podcast is for informational and educational purposes only. Always
do your own research and consult with a licensed advisor
before making investment decisions. If you got value from this episode,

(07:00):
follow the show, leave a review and share it with
someone who's nervous about the market. You might just keep
them from making a six figure mistake. Next time, we'll
dig into dividend growth investing and why it's one of
the most underrated wealth building strategies in the market. Until then,
stay smart, stay patient, and stay invested.