Taming the Fear Monster in a Market Crash

The market drops 20%.

It’s the exact moment you’ve been waiting for — that legendary opportunity to “be greedy when others are fearful.”

But your gut reacts faster than your brain. Amplified by glaring negative headlines, the hesitation sets in:

• What if it drops another 20%?
• What if this time is different and the market stays flat for a decade?

Suddenly, selling to protect your downside feels like the only logical move. You abandon the strategy and join the fearful crowd.

If this sounds familiar, you are not alone.

Even after decades of investing, I still get that knot in my stomach and I have also switched sides to join the “others” before.

Fear during a crash doesn’t make you a bad investor; it is simply a human reflex.

The good news? To build wealth over the long-term, you don’t need to be fearless, nor do you need to seize every single crash. You just need to tame the fear monster enough to take advantage of these opportunities.

Here is what has helped me quiet the panic and take action when everything feels like it’s falling apart.

Prefer to listen to this analysis while you multitask? Stream the companion audio here, or scroll down to read.

Ensure Daily Living Goes On

People often say, “Only invest what you can afford to lose.”

While the intent is right, I have always felt uneasy about that phrasing. Telling yourself money is “okay to lose” unconsciously frames investing like a trip to the casino, subtly nudging you toward reckless punts.

The hard truth: This is capital meant to grow your long-term wealth. You shouldn’t lose it at all.

Hence, it’s better to anchor your safety net to your real-world living expenses. Your mortgage, groceries, utilities, and family bills arrive like clockwork; they don’t care whether the stock market is up 10% or down 20%.

Ensuring that your cash flow and emergency buffers allow your daily life to go on, regardless of market chaos, is the ultimate psychological circuit breaker.

While I can’t give personal advice, I can share how my own strategy shifted before and after I quit my job.

Before Quitting: A 9 to 12-Month Cash Buffer

When I was working, my primary safety net was a standard emergency fund covering 9 to 12 months of living expenses. Beyond that, I relied on my active income to supply fresh capital whenever market weaknesses appeared.

I didn’t intentionally hold a large “war chest” because cash drag is a real penalty on long-term returns. In fact, when opportunities were simply too good to pass up, I occasionally let my emergency fund dip to six months, or even slightly lower.

Dipping into an emergency fund goes against standard personal finance advice, but context is everything.

Given my strong performance and the job stability of being an educator, along with a comprehensive insurance setup for hospitalisation and critical illness, I knew my baseline was safe.

That foundation afforded me the patience to deal with stock market volatility.

However, that changed when I decided to quit my job.

After Quitting: A 3 to 5-Year Cash Buffer

My biggest consideration before I took the plunge was ensuring that my family’s quality of life wouldn’t suffer. Achieving financial independence only to feel anxious and guilty about pursuing a new path would just be silly.

Knowing how volatile the stock market can be, and how long it can stay irrational, I decided I needed a cash buffer covering at least three years of living expenses.

The cash drag is undeniably real; my total net worth would likely be higher today without that idle cash.

But trading a bit of theoretical upside for total peace of mind is a deal I would make every time. In fact, my plan is to scale that buffer up to five years once I have access to my CPF savings in a few years’ time.

Avoid Leverage For Investment

Similarly, your mind will thank you for keeping leverage completely out of your investment portfolio.

There is a huge difference between taking on a manageable mortgage for a roof over your head and using debt or margin instruments to buy stocks.

Without leverage, you always know your maximum downside. And if you have done your fundamental homework on solid assets, the chance of your portfolio going to absolute zero is near zero.

Since you have already set aside the necessary funds for your daily living, you can simply afford to wait out the storm.

With leverage, however, your maximum downside isn’t just losing your invested capital. Margin calls and forced liquidations magnify your losses, which means you will be forced to dip into your safe assets to plug the hole.

The recent South Korea stock market crash, which wiped out countless retail investors who traded on leverage, is a somber reminder of its devastating impact.

It’s not just about losing money; some are so traumatised that they will never invest in stocks again, or they sink into depression.

Don’t Just Take My Word for It

During The Hour Glass AGM, Group Managing Director Michael Tay shared a powerful lesson from a past downturn. Even though the company’s debt-to-equity ratio was at a conservative 30%, in the heat of the crisis, it felt like 300%.

If a seasoned business leader feels the crushing weight of a modest 30% debt during a crisis, imagine what margin debt can do to you staring at a tumbling portfolio late at night.

Debt distorts your perspective and drains your mental stamina when you need it most.

Live Through The Crash

I used to have a fear of cockroaches when I was a child. That was until I had to deal with one when I was on my own. I plucked up the courage, rolled up a newspaper, and smacked it.

I still don’t like cockroaches, but the panic is gone because I know exactly how to deal with them.

It’s the same with market crashes.

While you should always have a plan, no amount of reading or preparation can substitute for the visceral experience of a real drawdown. Even a simple 10% correction is enough to trigger your brain’s fear response.

Behavioural resilience is built like an immune system: it requires exposure.

The first time you see a sea of red in your portfolio, it feels like a crisis. The third time, it feels like a familiar season.

Going through market drawdowns builds psychological scar tissue. You learn to draw on past experience, reminding yourself that you survived previous drops and that quality markets eventually recover.

So, start investing with a small amount as early as possible. Beyond giving your money time to compound, it allows you to experience volatility when the absolute dollar impact is small. The fear and pain are still real, but a drop won’t devastate or traumatise you.

This is especially true if you have accumulated significant savings after years of working. Dip your feet into the water; don’t jump into the deep end until you are comfortable with the temperature.

I shudder to imagine how my childhood self would have coped if I had to face a swarm of cockroaches instead of just one.

Stock Picking Can Be a Secret Weapon Against Panic

Some of you will disagree with me on this final point: picking individual stocks can actually reduce fear.

You’ve heard these arguments countless times:

• Diversification: It’s far less risky to invest in a broad basket of stocks.
• Hard to Beat: Most professionals fail to beat a broad index fund, so what makes you think you can? Even legendary investor Warren Buffett strongly recommends that most everyday investors put their money into a low-cost S&P 500 index fund.

To be clear: I am all for low-cost index funds. They offer a fuss-free path to building long-term wealth.

However, here is why I think a disciplined stock picker is often better equipped to handle a market crash.

Investing in a Passive Fund Doesn’t Make You a Passive Investor

A passive index ETF tracks a market, but it does not control your behaviour.

When you watch $200,000 boil off from a $500,000 portfolio, abstract ideas like “historically, the market always recovers” can feel paper-thin.

Just think back to early last year. What went through your mind when you read this CNA headline: “Singapore must adapt to ‘new reality’ where US is no longer prepared to underwrite global order: SM Lee“?

I don’t know about you, but I certainly felt the uncertainties that came with that shift. In a changing world order, does “the market always recovers” still hold true?

It doesn’t matter whether you invest in individual stocks or a low-cost index fund — doubts creep in during such times to test your conviction. When panic takes over, people start trying to time the market.

This is why empirical data shows that index investors routinely underperform the very index they hold: they still succumb to fear and greed. Capturing full market returns is rarely as effortless as most fininfluencers claim.

Understanding Businesses Gives You Constructive Agency

On the other hand, fundamental investors find their conviction in the underlying business.

When conviction is tested, you shift your focus from stock tickers to operating realities. Instead of staring helplessly at a falling index, you can check balance sheets, evaluate cash flows, and confirm whether a company’s underlying moat is intact.

This gives you agency.

You can reallocate capital, prune weaker holdings, or buy world-class businesses at a deep discount. The active process of analysing real businesses redirects your mental energy away from raw panic.

And there is another hidden psychological perk to holding individual companies: it gets you comfortable with price swings.

Single-Stock Volatility Prepares You for Market Crashes

It’s true that single stocks are a lot more volatile than an index fund.

However, this “disadvantage” of living through frequent micro-crashes actually helps in preparing you for the macro ones.

When managed within a well-sized portfolio, these smaller shocks act as training wheels.

It’s like playing a game at lower difficulty levels to get familiar with the controls before fighting the final boss.

By the time a broad market crash arrives, you aren’t experiencing intense volatility for the first time. You’ve already built the psychological muscle memory to handle it.

A Middle Ground: The Core-Satellite Approach

If you are an index investor, this doesn’t mean you need to abandon your index funds to gain these benefits.

You could consider adding a small satellite sleeve (e.g., 10% to 20% of your portfolio) focused on a few high-quality, familiar individual businesses.

Holding a combination of a broad index for core growth alongside a few well-understood, high-conviction companies gives you just enough hands-on engagement to stay grounded when volatility spikes.

Of course, if you are one of those rare, disciplined index investors who can comfortably tune out the noise and capture the full market return without flinching, stick to what works for you.

Final Words: Choose the Experience That Fits Your Stomach

I recently went to Mandai’s Rainforest Wild Asia, where adventure activities are categorised by different thrill levels.

If you don’t enjoy intense heights, you don’t need to force yourself onto the Ravine Swing or Split Rock Summit. You can get just as much satisfaction simply coasting on the Canopy Glider.

Investing works similarly, but with a powerful twist.

Just like you don’t need the most thrilling activity to enjoy a day at the park, you don’t need maximum volatility to achieve satisfying long-term returns.

But unlike at the park where each activity is mutually exclusive, you can blend broad index funds, individual stocks, and cash buffers to match your stomach.

The goal isn’t to pretend fear doesn’t exist; it will always rear its head when a crisis comes. By cutting off its fuel with zero leverage and a solid cash buffer, fear loses its power to drive your decisions.

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