How To Prepare For A Stock Market Crash
Let’s just get this out of the way; the stock market will crash. I can almost guarantee it. Nobody can tell you when it will happen, but you need to be prepared for a dip, crash, or correction in the stock market. The housing market is way overvalued, and interest rates are extremely low. Consumers are maxing out their available credit without thinking about what would happen if interest rates rise. Millions of people will face payment shock when the minimum payments rise on their variable rate, revolving debt.
Our fears are justified. We are only a few years past one of the largest recessions most of us have ever seen. We need to remember things can go wrong, and we need to be protected.
Buying on the dip
Say you waited until a major decline in the stock market to buy. You see, even if you think you get it right, you can still lose money in the process.
Imagine two investors, Terri and Tom, both investing $20,000 this year.
Terri is nervous in the volatile markets and stays in cash until things get safer. Tom knows that holding his investments long will keep his portfolio safer, so he diversifies his portfolio with funds from several countries. As it turns out, 2016 was a good year to diversify, with Europe having a meltdown, and then there’s the whole Trump thing.
Tom’s portfolio gains 15% this year, and he also receives some dividends, with a final account value of $23,400. Terri gets a bit of interest from her bank, ending with a total account value of $20,050. Then, at the start of the year, some things go bad, and the markets drop 10% in the first month.
Terri is feeling pretty great since she avoided the drop, right? Well, Tom lost 10%, but he still has $21,060, while Terri still only has the $20,050.
It does not look like staying in cash is the best protection. I am definitely not attempting to predict what will happen this year, but examples such as the one above are happening all the time in the stock market. Most of the time, the market is going up. If you stay invested, historically you will make money before and after any crashes occur, and usually more than you lose in those crashes.
Would you rather win $100,000 in the lottery and pay back $20,000 in tax, or only win $20,000 and keep it all?
How can you protect yourself?
There is always the risk of the markets going down right after you invest your money. Even if the market does not go down until later, you will probably get worried and ‘panic sell’.
Before you even deposit your money into your investment account, you need to understand the market can and will crash at any time. If you need some extra risk management, you should diversify your portfolio with bonds, cash, or other assets which won’t crash with the market.
You need to invent your risk management strategy – one which works specifically for you. This way, you are controlling the risk instead of the risk controlling you. With this safer investment strategy, you will be one step closer to the financial freedom you are seeking for yourself and your family.
The most successful investors have a risk management plan in place, so they do not have to worry about when a crash is coming. They invest as early as possible and stay invested as long as possible.