Both of these authors have taught me a great deal about finance, and their perspectives are worth considering. They agree on one critical point: while the market appears stable now, a crash is likely on the horizon.
When Will It Happen?
While it’s impossible to predict the exact timing of a market downturn, my best estimate places it within the next two years.
What Does This Mean for You?
The Financial Crisis of 2007-2008 was a tumultuous period characterized by widespread unemployment, foreclosures, and bankruptcies.
However, if you’re in your 20s like I am, you may have been sheltered from those events, thanks to the protective walls of education.
For many of us, the next downturn could be our first introduction to a market crash in the “real world.” Should you be worried? Not if you’re well-prepared.
As Benjamin Franklin wisely stated, “By failing to prepare, you are preparing to fail.” This letter will equip you with the tools to be ready when that storm hits.
Step 1: Actions to Take Before the Market Crashes
- Expect It
Understand that market downturns are a part of the economic cycle. Historically, bear markets (defined as a drop of 20% or more from the peak) occur regularly. Here are five recent examples:
- Black Monday (August 25 – December 4, 1987): Decrease of -33.51%
- Dot-Com Bubble (March 24, 2000 – September 21, 2001): Decrease of -36.77%
- Stock Market Downturn of 2002 (January 2 – October 9, 2002): Decrease of -33.75%
- Financial Crisis of 2007-2008 (October 9, 2007 – November 20, 2008): Decrease of -51.93%
- 2009 Bear Market (January 6 – March 9, 2009): Decrease of -27.62% Expecting these changes prepares you for the realities of the financial landscape.
- Diversify
It’s essential not to rely solely on stocks. A balanced portfolio should include bonds, which can help stabilize your investments during market fluctuations. A recommended allocation is to have about 10-20% in bonds. Additionally, consider keeping a portion of your portfolio (around 5%) in cash to take advantage of buying opportunities when stocks are down. - Have a Backup Plan
Market declines often lead to lower business revenues, which may affect salaries and employment. Ensure you have connections in industries that can offer you alternative employment should your current job become insecure. I also advocate for having multiple income streams. Relying solely on one source can put you at risk during economic downturns. As the saying goes, “Two is one and one is none.” - Eliminate Debt
If you find yourself in debt prior to a crash, your situation could worsen, especially if job losses occur. It is prudent to focus on paying off existing debts to protect your financial health.
Step 2: What to Do After the Market Crashes
- Embrace the Opportunity
Ironically, downturns can present the best opportunities for both new investors and entrepreneurs. The optimal time to invest is often during a market crash, as prices are lower. As history shows, starting a business during economic downturns can lead to innovative solutions and successful new ventures. - Adjust Your Spending
During challenging economic times, it’s wise to adopt a more conservative spending approach. This could include reassessing your budget and prioritizing essential expenses. - Invest in Stocks
The best time to buy stocks is when market sentiment is at its lowest. Research indicates that when consumer sentiment falls by more than 60%, significant market gains can often follow. Warren Buffett famously advised, “Be greedy when others are fearful.” - Purchase Desired Items
If you’ve considered buying a house or a car, the post-crash environment can provide excellent opportunities. Following a significant downturn, many individuals may find themselves needing to sell their assets, creating favorable buying conditions. - Avoid Selling
During market downturns, resist the urge to sell your investments. If you have properly diversified your portfolio, you shouldn’t need to sell assets in a crisis. Panic selling can lead to substantial losses. Instead, stick to your investment strategy, which I suggest involves holding index funds for the long term—30 years or more. As Jack Bogle put it, “When you see your portfolio drop by 50%, it’s essential to remain composed.”
Final Thoughts
Today, we covered key strategies for preparing for a market crash:
- Anticipate economic downturns.
- Diversify your investments beyond stocks.
- Have a contingency plan.
- Aim to be debt-free.
And what to do during and after a crash:
- Embrace downturns as opportunities.
- Revise your spending habits.
- Take advantage of lower stock prices.
- Look for goods and assets at reduced prices.
- Avoid panic selling.
Thank you for joining today’s discussion! I look forward to our next conversation.
Be well!
Let me know if you need any adjustments or further assistance!