I will not bury the ice. There will be another stock market crash.
I know this not because stocks are overvalued (although they probably are) or because COVID cases continue to rise, or because the federal government seems unlikely to compromise on greater financial relief or for one of nearly a dozen other reasons.
I know this because the stock market is collapsing always I’m coming. In fact, I’ve only experienced all my life:
- The disaster of 1987, when S&P 500 lost more than 30% of its value in just under 40 days
- The DotCom bubble burst when S&P fell more than 44.7% in two years in the early 2000s
- The financial crisis of 2008, when the market missed more than 50% of its value in less than a year and a half
- The coronavirus accident
But despite the fact that I am 100% sure that the market will collapse again, I am not worried about my investments or I plan to reduce the amount I put on the market. And if you did the right thing, you shouldn’t be both. That’s why.
You can’t predict a market crash, but you can be prepared for one
Although no one ever knows when a market crash will happen, everyone should know that it can happen every day.
In fact, crashes often come as a result of bursting bubbles, so everything can look like it’s going really well with the stock market (or real estate) – before all of a sudden … it’s not.
Since you cannot predict when an accident will occur, you must be prepared for it at all times. This does not mean keeping your money out of the market, as you have to invest in stocks to build wealth. Instead it means:
- Don’t invest money that you will need in the near future. Some recoveries are very fast (including the latest). Others can take years. If you have invested money that you will need over the next two to five years, you may not have time to wait for the market to recover and be forced to sell at a loss. You don’t want to do that.
- I’m not trying to determine market time. Since it is impossible to know what will happen, do not try to buy at the bottom or sell at the top. Instead, invest in the long term and consider averaging the cost of dollars to acquire your positions. This means investing the same amount in similar assets at regular intervals, so the chances are good to buy some shares at a high price and others at a low price and things will level out.
- Paying attention to risk exposure. Excessive investment in stocks is a risky endeavor, as it increases the chances of incurring large losses during a market crash. At the same time, do not invest enough in stocks is also risky because you will miss the chance to win a reasonable return. Take the time to think about which balance is right for you.
- It does not pursue short-term profits. If you want to be prepared for a market crash at any time, your portfolio cannot include investments that you would have been dissatisfied with for years – just in case you happen to own them when a crash occurs and you have to keep them until recovery to avoid locking losses.
- Assess what kind of investor you are. It is difficult to constantly beat the stock market – especially during turbulence. While it was easy for most people to make money in 2010, when market volatility was low, these are much more uncertain times. If you are a nervous investor who is likely to react out of fear or do not have a solid investment thesis, investing in index funds may be a better bet than choosing individual stocks. At no point would an investment held consistently in an S&P index fund be a losing investment if you had owned it for at least 20 years – so you take much less risk in the event of a crash if you choose one, because everything but surely your investment will recoup all losses over time.
If you take these five steps, you can join me, knowing that you are 100% ready for a market crash, whether it happens today, tomorrow or in five years.