The Market Crash Response Protocol
Train your psychology to hold firm and buy more when markets plunge
The Market Crash Response Protocol is Collins' psychological framework for handling the inevitable and recurring market downturns that destroy most investors' wealth, not through the crash itself, but through their panicked response to it. Collins argues that the single most important skill an investor can develop is not analytical but emotional: the ability to watch your portfolio lose 30-50% of its value and do absolutely nothing, or better yet, buy more.
Collins catalogs the major financial crises he has lived through as an investor: the 1974-75 recession, late-1970s inflation, the 1987 Black Monday crash (the biggest single-day drop in history), the early 1990s recession, the tech crash, 9/11, and the 2008 financial crisis. Through all of these disasters, the market recovered and went on to new highs. The pattern has held for over 120 years.
The protocol requires understanding the concept at two levels. The intellectual level is easy: markets always recover, crashes are normal, panic selling locks in losses. The gut level is hard. Collins himself failed this test in 1987, selling near the bottom and buying back in only after the market had surpassed its pre-crash high. That expensive mistake taught him to be tough enough to weather every subsequent storm, including the 2008 crisis when global financial collapse seemed imminent.
- Market crashes are absolutely normal and have happened repeatedly throughout history
- The market has recovered from every crash in 120+ years of recorded history
- Expect to see 2008-level events approximately every 25 years over a long investing career
- Panic selling is the only way to permanently lose money in a market that always rises
- You must know the market will crash not just intellectually but deep in your gut
- Market drops during accumulation are buying opportunities: stocks on sale
- Nobody can predict when crashes will happen or when they will end
- The media profits from fear; your wealth depends on ignoring it
- Accept crashes as inevitable before they happenInternalize that your portfolio will lose 30-50% of its value multiple times during your investing career. This is not a possibility; it is a certainty. Collins tells his daughter to expect 2-3 events of 2008 magnitude over her 60-70 years of investing. Smaller corrections will happen even more frequently.
- Disconnect from financial media during downturnsWhen crashes happen, the financial media will scream 'Sell! Sell! Sell!' Experts will declare the end of the financial world. Ignore all of it. Turn off CNBC. Stop reading market commentary. The media profits from drama; you profit from patience and inaction.
- Continue your regular investment contributionsIf you are in the accumulation stage, keep investing your regular monthly amount. Better yet, invest more if you can. Market crashes mean you are buying shares at a discount. Collins describes this as stocks being on sale. This is the only time you get to buy low.
- Reframe the crash as a self-cleansing eventRemember that your index fund is self-cleansing. Weak companies will fail and be replaced by stronger ones. The surviving companies are filled with people working to adapt, compete, and grow. The crash is the process by which the market becomes stronger.
- Review historical recoveries for emotional reinforcementLook at the long-term market chart. Find the 1987 crash, the 2000 crash, the 2008 crash. Notice how each is a small blip in the relentless upward march. Let the historical pattern sink in emotionally, not just intellectually.
During the 2008-2009 financial crisis, Warren Buffett 'lost' approximately $25 billion as his fortune dropped from $62 billion to $37 billion. But Buffett did not panic or sell. He continued to invest, recognizing that the sharp decline offered new buying opportunities. When the market recovered, as it always does, his fortune recovered with it.
During the 1987 Black Monday crash, Collins called his broker at the end of the day, unaware of what had happened. The market had dropped over 22% in a single day. Collins held for three or four months as stocks continued to drift lower. Then he lost his nerve and sold near the absolute bottom. When the market inevitably recovered and surpassed its pre-crash high, Collins had to buy back in at a premium. This failure taught him the gut-level lesson that intellectual understanding alone could not provide. He never sold during a crash again.