- Market crashes are bound to happen
- Instead of being fearful, investors can prepare for it
- 4 key points on how to prepare for a stock market crash
It happened on a Monday in October 1987 when the Dow Jones Index lost more than 20% of its value. As we can see from the extract, the market rose in value very steadily before the crash happened. It is a familiar picture isn’t it?
Source: Google Finance
Kind of like the one we see today.
2. It Will Definitely Happen Again
Whether we like it or not, it will happen at some point in the future. Whether it happened in 1987 as a single day drop, the dot-com bubble, or the 2007 – 2009 Financial Crisis, investors ought to know that the market will at some point pullback.
With so much going on in the world (Brexit, negative interest rates and yes, the U.S. Presidential Election) and with our exposure to what is constantly preached on the media about how markets are about to go into free fall again, investors are feeling less and less settled as the days go by.
The question here is are you worried about the next 20% drop? Should you be?
If more investors adopt the patient and common sense approach of Warren Buffett rather than worrying about the next big drop – or even freshened up their watch lists with great companies to invest in – they’d be wealthier and more at ease than if they spent all their time worrying and trying to get out ahead of the crash.
Yet doing that is really, really hard, which is probably why so many people don’t.
The markets will crash again. So, what can investors do to prepare for the next market crash?
3. Ways to Arm Yourself Ahead of the Next Downturn
- Never ever invest money you will need within the next 3 to 5 years.
This should form the basic premise of any investing decision that you will ever make. Any cash you need to pay for your education or buy a car or simply live on should not be in the market. If you are living off your investments, rather than a ready cash supply, then you’re exposed to the risk of having to sell at the worst possible time just to raise the money for basic living expenses.
- Build up a small cash cushion inside the portfolio.
People sometimes call this “dry powder” because you’ll want to be ready for action when a compelling buying opportunity comes along. A cash position that’s 5% to 10% of your portfolio shouldn’t be enough to significantly drag down your returns, and you’ll get a bit of a buffer when prices start to tumble. Another upside of having a cash cushion is that investors can sell cash covered put options on it. So, it isn’t really sitting idle in your portfolio.
Note: This is a separate bucket from the cash set aside for shorter-term spending, described above.
- Create a shopping list of businesses that you’d like to buy.
These could be companies new to your portfolio or ones you already own, but the idea is that you already know them and wouldn’t have to do much research if the price dropped down to your ideal buy price.
- Do all of the above before the market makes its next drop.
Trying to raise cash in a declining market is stressful; you’ll be competing against a bunch of other people and get worse pricing as a result; and you might be overcome with emotion, ready to sell anything, which you may come to regret.
By taking these simple steps, you’ll feel better knowing you have a plan of action for the next market drop, and you’ll be able to act more rationally than others, having thought things through ahead of time. That alone will give you an advantage.
With that done, you can lean back and successfully practice sit-on-your-butt investing, knowing you’ll be ready to move when the time is right.
Yes, the Dow Jones index does look like it is reaching an all-time high. No, we should not be worried if we have prepared ourselves for downturns.
If you want to know How to Double or Triple your Money Out of Any Upcoming Crisis, click on the picture below to register for our Free Value Investing Masterclass.
Research Analyst, Mind Kinesis Value Investing Academy
Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.