You’ve heard all the talk about a stock market crash. You think you need to do something, but what? Where to put your money BEFORE the market crashes?
Do you buy stocks when they’re down? If only there were some way to predict when the market would crash.
This blog post will explore why doing nothing might be the best thing for nervous investors to do. So read on – to save yourself a lot of time, money and stress about markets crashing. Knowledge is power!
“Invest for the long haul. Don’t get too greedy, and don’t get too scared.” Shelby M.C. Davis
What is a market crash?
A market crash is when the stock market falls rapidly within a short space of time. This often results in many people losing money and investors pulling their money out of the markets (which can make everything worse).
Typically, we think of a “crash” as something that happens overnight, but it doesn’t have to be that way – and if you prepare for it, you can actually benefit from it!
There is no agreed percentage definition of what constitutes a crash. It often depends on how the media feels and if it feels it’s a big enough drop to interest the public.
A drop of 10-15%% is considered a correction, and a decline of 20% or more is called a bear market. It’s called a bear because bears attack striking down.
The opposite of a bear market when stocks go up rapidly is called a bull market because they attack by striking their horns up.
The fundamental principle behind investing is understanding temporary declines vs permanent advances.
No matter how scary and how many people are shouting at the moon, all declines have been temporary. But But But this time it’s different – yep, just like every other time.
Temporary declines vs permanent advances.
“The stock market is a device to transfer money from the impatient to the patient.” Warren Buffett
Is the market going to crash?
Yes, There you have it; you can now move on with your life, knowing the market will crash.
You can expect a drop of between 10-15% every year, and about every 3-5 years, you will get a 20% or more price drop in stocks.
So yes, the market will crash; we just have no idea when and nor does anyone else.
There will be plenty of people forecasting a drop for this or that reason, and one day or another, they will probably be right.
They will be right one day because we have drops, corrections and bull markets again and again. It’s all part of the market cycle.
So yes, eventually, they will be right like a broken clock is right twice a day. The question to ask is, how many of these stock market crashes have been permanent?
Exactly non. We have a shock; people freak out, and slowly but surely, the markets, the great companies of the world, get on with their business and continue to innovate and grow. And back comes the stock market to pass is previous high.
“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” Peter Lynch
Where should I put my money before the market crashes?
If you want, you can try and do a hokey kokey pulling your money in and out, but that is just half a strategy.
- What happens if the market doesn’t crash?
- When will you reinvest your money after the crash?
- When will the crash end?
Selling out before a predicted market crash is the start of a bad idea. So you sell out and then sit on the sides waiting for what?
- It to return to normal?
- Clarity on the outlook for the world?
No one can predict the markets. Some get lucky once but very rarely do it again with any accuracy.
They just live off that one correct prediction for the rest of their careers. If you feel you just can’t take it anymore, when could be the worst possible time to sell?
When your stocks have already gone done – now you are going to turn a paper loss into a real loss. If you freak out, it’s probably telling you next time you need to be in less volatile investments.
Things that have a smoother ride. But with a smoother ride comes the trade-off that the downs won’t be that steep, and rises won’t be that great either.
“Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” Peter Lynch
Is a market crash the best time to buy?
It can be because if you believe it, this is when stocks are on sale!
What do you do when apples, cakes, and Ferraris are on sale?
You buy more of them. You never know when a market is going to crash, starting or finishing crashing. So trying to time the market, i.e. waiting for the perfect time, is a bad idea, as you will be waiting and waiting and unsure if this is it or not.
The best thing to do is to keep investing regularly as you have always been – keep dollar-cost averaging through the highs and lows.
Your behaviour, in this case, continuing to buy stocks no matter what, will be the key to your long-term wealth success.
Is it safe to invest in the market now?
As safe as it’s ever going to be, probably. It all depends on what you mean by safe. Will your stocks go up and down?
Yes, is that safe?
If you invest in single stocks, then the volatility and risk will be much higher than investing in globally diversified index funds – funds with 100’s if not 1000s of companies in. Risk = that you lose your money and lose your purchasing power.
Losing your purchasing power is a risk you face with inflation. Volatility = the price of your stocks going up and down – which they do all the time.
The first thing to learn about safety is risk vs volatility. The real risk is what YOU will do when the volatility gets too much for you – will you keep calm or panic and sell at a loss?
Over the long term, the stock market goes up 75% and 25% of the time. Leave it long enough, and the chances of it being up to get better and better.
Single stocks carry more volatility and more risk.
Do you lose all your money if the stock market crashes?
In short, no, you don’t – the way you lose all your money through your behaviour in a market crash (temporary decline).
Here we need to understand the difference between temporary declines and permanent losses.
Yes, individual companies can go bust, but 1000s of companies across 100s of countries? That seems a lot less likely.
That’s why funds, not individual stocks, are a “safer” place for your money. You will likely lose your money if you are invested in single stocks and the companies go bust, or you see a paper loss and turn it into an actual loss by selling your stocks once they have already fallen.
If you didn’t sell your stocks, they would likely recover overtime return to their previous value and then go upwards from there.
You only lose all your money if your single stock companies go bust and or you sell out at the bottom of the market. If you did neither of these, then you would have a much greater chance of keeping and growing your wealth over the long term.
“The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.” Benjamin Graham
How can I prepare for the stock market crash?
Educate yourself, books, podcasts, financial coaches and planners. Have a clear plan of what you are going to do, i.e., likely nothing Understand the principles of growing wealth over the long term.
- Investing vs speculating – long term wealth vs quick profit
- Compound interest – interest on your interest – start your wealth snowball.
- Understand the history of the stock market – temporary declines vs permanent growth
- Volatility up and down vs risk the complete loss of your money and purchasing power.
- Taking the risk of investing when you are young or waiting until you are old – can you afford to take the risk of running out of money or purchasing power in your old age?
How long does a market crash last?
Market crashes can last a few hours, days, weeks or years. The longest market crash was in 1929 when the Dow Jones dropped 70% and took about 3 years before it reached its bottom and started to recover – but it did recover! Big declines are usually connected to world economic crisis
- 1929 great depression
- 1987 Black Monday
- 2001 dotcom bubble
- 2008 financial crisis
- 2020 Covid pandemic
At the time very scary, but what happened next – the markets recovered and went to new highs.
How do you profit from a bear market?
By investing in the world’s great companies through well-diversified low-cost index funds. Don’t panic, turn off the news and ask yourself
- Is this the end of the world?
- Are all companies across the world going to go bust?
- Will the world never recover?
- Have the great companies of the world permanently lost all their value?
- Or is this just a temporary setback that a solution will be found for like all the other time?
When stocks are on sale, why not buy more of them?
What are some things to do before the market crashes?
Here are a few possible strategies that you could employ to keep your money safe during a market crash.
- Have a clear life and financial plan
You need to clearly plan what you are investing for and when you need the money.
This will help you understand how to get the right asset mix for your needs and temperament. Your plan needs to detail what you will do when a market crash comes – will you panic or keep calm?
The plan needs to detail what you will do when it drops 5, 10 and 20+ %.
Ideally, it’s nothing if you continue to invest in the world’s great companies – especially as they are now on sale. A plan might well be your best protection against a market crash, especially when they are so regular.
- Dollar-Cost Averaging/pound cost averaging
Dollar-cost averaging is a strategy that involves investing regularly every month. With dollar-cost averaging, you buy more of the stocks when there cheap and less when there expensive – meaning that you get more of your money into the market when everyone else is pulling theirs out In general, when a crash occurs, it’s because panic has set in, and people take their money out of the market.
If you can take advantage of that fear (while managing your own) by dollar-cost averaging, you could possibly benefit from buying up all the great companies of the world on sale!
3.) Stop watching the news Watching the news will only scare you and tempt you into doing something disastrous for your long term wealth and sanity.
Stay away from the doomsayers and get on with your life. How many times in your life has the world been about to end? If you have reached your 40’s at least 4 or 5.
If the world truly is about to end, then money doesn’t matter anymore, and selling everything won’t make a difference. Your reaction to the news is what might kill you and your long term wealth. A study by Fidelity found that the best investors were dead and those that had forgotten about their accounts. That’s because they had just left their money alone to compound and compound.
4.) Invest in yourself! If there is a crash, you don’t want to be the one holding the bag.
Those who have prepared for it will have a better chance at coming out on top – so prepare now before everything gets crazy!
Learning about investing might be the best investment you have ever made.
Read the right books, listen to the right podcasts and truly understand the difference between investing and speculating. Investing in financial literacy will be your greatest protection against a coming market crash.
Long term planning vs short term reacting
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.” Benjamin Graham
Conclusion: where to put your money before the market crashes
If When there is a crash, you know now that declines are temporary and the advance is permanent.
If you can hold your nerve, it might even be a time to buy the world’s great companies at sales prices. Educate yourself and plan for the next unknown, but sure to come stock market crash. Single stocks will have a much choppier ride.
Funds holding 100’s or 1000’s of companies will ride out the storm much smoother due to their diversification of companies, sectors and countries.
Choose your ride but remember that trying to jump off a rollercoaster while it’s moving is probably a bad idea.
Those who have prepared for it will have a better chance at coming out on top – so prepare now before everything gets crazy!
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