Returns and Crashes

Buy and Hold.  This is the strategy of the EMH, where you humbly accept that you can't beat the market, and just hitch in and ride along.  Just don't sell during the downswing and you will be fine.  Just don't sell.

Are you better than the market?  Do you know better than the average?  If you take this advice you are tacitly assuming that you know better than most people, that you are better at not selling.  Not selling, which some people struggle with during bull runs (gotta lock in my gains!), becomes much harder during a down swing.  Why do markets fall?  Because there are more buyers than sellers.  Straight line definition, if no one sold there would be no downswing!

But we get downswings, and not just normal buying and selling, massive volume downswings with 5x the volume of pre-crash movements at times. 

So why are you better than the market at not selling?  Why are you going to be better than the guy yelling "sell, sell, sell" when the panic hits?  How is this justification different from the guy analyzing Tesla's balance sheet and coming up with 'reasons' why his position is the right one?  Remember that your investment strategy, no matter how simple, requires you to be good at something, even if it is "not selling" just to match the market. 

Do people sell because markets crash, or do markets crash because people sell?  The two are inseparable, to avoid selling you need to have an idea of why people commit this investing sin.

A lot of selling is structural.  People who profit from selling puts during the bull market end up selling into the dip quite often.  Sometimes they are literally forced to sell to pay out when the option approaches expiration, and sometimes they notice that the value of their collateral is dropping while their obligations are jumping.  Selling puts and using securities as collateral doubles your leverage, more gains in good times and more losses in bad.  Some people feel forced to sell as they see bonuses dry up, fear of unemployment, and declines in other personal assets that accompany (or cause) recessions.  These relationships can be large and complex, when the markets were demanding that AIG raise capital in 2008 they went borrowing, at least some of the people that they borrowed from would have sold stock to make the loan or buy equity in AIG. 

Leverage is the number one cause of selling, and it can come from anywhere be it covering a position that turned against you or the car payments you owe on the vehicle you stretched to buy.  Did you co-sign your child's college loans?  Welcome to leverageville, population: you.