It’s perhaps the most-asked question among investors.
Taken at face value, the answer to “Is the stock market going to crash again?” is always yes. Sooner or later, it has to.
Of course, most people aren’t asking the question over a timeframe of forever. What they want to know is “Is the stock market going to crash again soon?” If they can predict when a slide is coming, they can take their money out of stocks and keep it on the sidelines until said crash occurs, after which they can swoop in and buy at bargain prices.
That sounds good in theory. In practice, it doesn’t work. Markets crash, but accurately predicting when one will happen isn’t possible. Given the rafts of pundits and analysts who regularly predict that trouble is coming, every downturn will have a lucky few individuals whose prognostications lined up closely with the real-world results. But anyone who pretends to be able to pull off this trick consistently either has a product to sell you or really likes to see their face in the media. (Or both.)
How do you prepare for a market crash?
Markets crash, and they (eventually) recover. How long a recovery takes varies, but a long-term chart of the U.S. market shows that bull markets over time erase even the worst crashes. (Admittedly, that hasn’t always held true in other countries’ equity markets — for example, the Nikkei tanked in 1990 and hasn’t set a new high in 35 years. But domestically, the rallies have consistently outweighed the declines.)
In light of that pattern, preparing for a stock market crash involves doing just a few things:
- Make sure you’re not investing money that you may need in the next year — or really, in the next few years. That means that if some of your portfolio is meant to cover college tuition and your kid just took the PSATs, you probably want to start converting some of your holdings into cash.
- Make sure you own shares in good companies that will come out of any crisis well, even if their businesses might suffer and their share prices fall in the short term.
- If possible, have some cash ready to invest in shares of good companies when a market drop lets you buy at a discount.
The first two are requirements. The third is nice, but it’s negotiable because sometimes the reason for the crash (like the current pandemic) may impact your ability to earn money or require you to divert capital to more immediate needs rather than using it to build your portfolio.
However, if you have cash on the sidelines, do not try to predict the absolute bottom. Identify the companies you want to own (or want to own more of) and get your cash working even if that means buying before the market hits its low point. Just as nobody can be sure when a steep decline is going to start, nobody can know when the rebound is going to begin either.
Be calm and invest on
Stock markets crash, and stock markets boom. The problem is that nobody knows the lifespan of either condition. That’s fine, and it’s nothing to worry about if you buy shares in good companies and hold them for the long term.
Don’t panic when something bad happens in the broader market and the economy at large. Remember why you bought shares in the companies you hold in the first place, and trust your thesis. Good companies persevere.
It’s never fun to see your portfolio drop in value — especially by a large amount. But you are not playing a short game. You’re invested for the long run, so you don’t have to worry about stock prices on a daily basis. Keep your eyes on your long-term goals and remember that every U.S. bear market has (eventually) been followed by a bull and a new all-time high.
Author: Daniel B. Kline
Source: Fool: Is the Stock Market Going to Crash Again?