The Stock Market Will Crash And You Need To DO THIS NOW
So, the stock market will crash. It’s happened time and time again. It’s a scary truth, but there’s really nothing we can do about it. But, that doesn’t mean we can’t prepare ourselves to not only survive, but thrive during a crash.
I’ve been investing for more than 30 years and as you can imagine, during that time, I’ve experienced a lot of these crashes. And, I’m not just talking about when I used to race cars.
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To be honest, investing is a little bit like motor sport. It can be a very bumpy ride. In fact, the S&P 500 has seen a 10% drop 38 times since 1950, which works out to a minor crash every 1.8 years.
During that time, I built my investments to over a million dollars starting from nothing, and weathered three different major stock market crashes.
So, today I thought it’d be a good idea to discuss the three stages of a crash, so you’ll be able to outsmart other investors and hopefully make some money. This is based on my own personal experience, and it shouldn’t be taken as financial advice.
Number one, the honeymoon phase. Just think about when someone you know got married. They were probably totally obsessed with each other, as everything was just so new and so exciting.
During this time, it’s extremely hard to see what could ever go wrong. And, let’s be honest, you probably wouldn’t wanna think about the negatives anyway. This is very similar to the stock market. When I start seeing this blind happiness, I prepare my investments for when everything comes crashing back to reality.
Before the 2008 financial crisis, there were a couple of things that I noticed that really made me cautious about the future.
First was the boom in consumer spending. Everyone had money. They were spending thousands and the economy was thriving. So thriving to the point I could have probably sold a house brick to a customer in my shop and claimed it was the latest tech gadget.
Okay, maybe I’m exaggerating. But the point is, people were buying so many unnecessary items, as money was burning a hole in their pockets. The current NFT craze seems very similar to this.
Never in a million years would I have thought people would be buying JPEG image files for millions of dollars. Don’t get me wrong, I am very interested in the NFT space, but I do think prices are extremely inflated.
Maybe I’ll get in once everything dies down a bit. The second thing I noticed in 2008 was the increase in the number of people buying houses or refinancing.
This is because it was easier than ever to get credit, as the housing market was booming, which meant if people were unable to pay off their mortgages, then the bank could just take back their properties without losing any money.
I think the banks and regulators have learned from their mistakes in 2008, as it’s now much harder to take out these kinds of loans. But, interest rates are pretty low currently, which means lots of people will be refinancing.
Now, it’s one thing noticing these little clues, but it’s another thing actually taking action and preparing yourself. Between 2007 and eight, I could have just gone along with the crowd as the general herd mentality was that everything was great and nothing would ever go wrong.
But instead, I started to prepare my investments for the worst. At the time, lots of my friends and fellow business owners didn’t quite understand the decisions I was making.
They may have even seen me as a bit of a coward, but from my perspective, I didn’t think they understood just how much risk they were taking. So, if your Spidey senses start tingling, these are some of the things you can do to prepare yourself for the worst.
First, I would evaluate and minimize your risk level wherever possible. Personally, I’m not focused on chasing crazy high returns as that’s unsustainable for the long-term.
I just want to be making small gains consistently, so my money compounds. I always think about the story of the tortoise and the hare. I know it might sound boring, especially coming from a boomer like me, but slow and steady does win the race.
If you’re new to investing, there’s a high chance that you haven’t experienced a real market crash. It can be horrifying to see your portfolio completely halving value and sitting deep in the red for a brief period of time.
So, you have to ask yourself if you can mentally handle this type of drop without selling all your investments.
Secondly, I would start to reduce my leverage. Now, on one hand, leverage is a great way to accelerate wealth, but it can also be very dangerous. In 2007, I borrowed money from the banks to purchase rental properties. And, in a perfect world, the tenants would just pay off the mortgages over many years.
However, nothing is ever as easy as it sounds, so I made it a priority to pay down those debts to a reasonable level, just in case.
Leverage is used a lot in the stock market too. And it’s called margin, which is essentially investing with money that isn’t yours. Now, this is a great idea if you buy stocks that are rocketing in value, as you’ll be making so much profit, you’ve got nothing to worry about.
But, the issue here is, you never know which way a stock is going in the short term. If a stock crashed too far, you’re invest in that may issue a margin call, which means you have a limited amount of time to pay off your debt.
And if you don’t, your brokerage may sell your stocks at the bottom of the market to recover the money you borrowed. If this is something you’re considering or even doing, then if I were you, I would be paying some of this debt off.
I never use margin, and that’s a personal choice. And, I’m well aware by not taking the risk, I’m missing out on some potential profits. The truth is I’ve seen too many of my friends go from millionaire status to broke in a blink of an eye.
And, now I just stay well clear of it. Thirdly, I would start saving some extra cash in a high interest savings account. I know always bang on about having an emergency fund of three to five months of your living expenses, but I’m talking about saving even more cash.
I did this between 2007 and eight, and from the outside, it looked a bit strange. The market was booming and by leaving my money in the bank, I wasn’t taking advantage of it.
However, I didn’t take this decision lightly. I’ll talk more about this when we get onto the next stage. I actually remember the exact moment
I chose to slow down my investments and start holding more cash.
It was when my hairdresser started to ask me what stocks I was investing in. When everyone starts getting comfortable with the idea of investing, it can be a sign that a bubble is forming.
The trouble is, at the first sign of a crash, lots of people panic sell, which drives the prices down even further, leading to a spiral of doom.
Finally, I would make sure my investments were properly spread out. This is called diversification, and it’s one of the best ways to help withstand a market crash, as quite simply put, you haven’t got all your eggs in one basket.
This is all because you never know what sector is gonna be hit the hardest. I mean, who would have thought restaurants would have been a poor investment, as everyone needs to eat?
But, the pandemic shocked all of us by forcing them to close for months on end. During good times, it can be very common for people to do very well with one or maybe two stocks and end up with most of their money focused in only a couple of different companies.
Even if they start out with lots of different stocks, it can almost seem silly to put all your money into other things when one stock outperforms all the others.
Let’s use some of my favorite stocks as an example. Say, you have a thousand dollars to invest. Now, you could put the entire 1K into Tesla with the hopes of it going to the Moon, but Tesla gets hit the hardest in a market crash.
It won’t be good news for your money. Whereas, investing $250 into Tesla, $250 into McDonald’s, $250 into Square, and $250 into Enphase would be a great diversification, as you’re invested in multiple different industries.
That’s also why index funds are so popular, as they spread your investments over lots and lots of different stocks.
Number two, the awakening phase. I like to call it this because everyone gets rudely awakened to the truth, and only the ones that know how to navigate it will be able to hold their nerve and make some real money.
This is kind of like when a married couple finds out about an affair.
It brings that whole world crashing down. What I’m really trying to get at is the stock market just comes tumbling down and it’s next to impossible to be unaffected.
Even my son knew something was happening back in 2008, and he was only 10 years old at the time. The number of customers in my stores halved overnight. And, even when they did come in, they didn’t spend anything. On the bright side, I had lots of products which I owned in my warehouse, and it was absolutely full.
It was like a safety blanket. But, this wasn’t the case for everyone, as even if they had products to sell, they had to get rid of them fast to pay their rapidly growing credit bills and rents.
But, why am I mentioning this? Well, in 2008, I saw dollar stores opening up everywhere. It was the perfect mixture of demand for cheap goods and supply of products from failing businesses.
Because of this, dollar stores are often unsustainable, as they’re requiring stock from struggling businesses desperate for that cash, and then passing these savings onto their customers.
It’s important to notice, as the stock market goes through cycles, and another market crash is very likely at some point. But, that’s all right, as there is money to be made in all the madness.
Even if you manage to predict all the signs of a crash and prepare correctly, this is why you are really tested. It’s more about human psychology, as most people’s initial reaction is to sell off all their investments and cut their losses.
But, fear is the path to the dark side. Fear leads to anger, anger leads to hate, and hate leads to suffering. The people that give in and sell their investments are usually the ones that just think the stock market is not for them, or the game is just rigged.
If you believe in your investments then you have to hold firm. I like to remember the wise words of Gandalf, “You will not sell.” Well, that’s the way I like to remember it.
A study by Fidelity actually found that if you invested $10,000 between the 1st of January, 1980 and the 31st of March, 2020, and if you kept all your money invested, you would have over $697,000.
But, if you decided to sell your investments, and ended up missing the five best trading days, then you’d only have $432,000. The crazy thing is that missing 50 of the best trading days brings you all the way down to $48,000.
So, you might think you’re being smart by timing the market, but in the long run, you’re probably only going to hurt your own profits. But, there is a lot more to it than just holding firm if you believe in your stocks long term.
In 2008, I saw what the dollar stores were doing, and instead of seeing a competitor, I saw an opportunity. If they could buy things for bargain prices, then it must mean there were amazing deals available.
So, I went out hunting. I went on a bit of a buying spree over the next couple of years, and acquired lots of different assets, including stocks and even entire businesses. I knew that I’d be unable to time the exact bottom of the market, so I invested every week. This is called dollar cost averaging. Cash is really king.
If you have it, then you can snap up some amazing investments during this time. The bottom line here is, that while some choose to panic sell and lose all their money, others choose to double down and buy the dip, which if done correctly can make you a fortune.
Buy the dip, baby! I feel I have to mention that some investors also like to short stocks, which is basically betting that a stock will go down. It’s not something I personally do. However, some people have been very successful with this strategy.
Number three, the resurgence phase. After weathering the storm, we get to the resurgence phase, and this usually pushes above and beyond the last market highs.
Think of this like a married couple renewing their vows. They come back even stronger than before. I noticed that four years after the 2008 crisis happened, just after the London Olympics, things started to improve.
Businesses were hiring, and money was a bit easier to come by. But, even though people started have cash again, the mentality of not spending carried through for a while.
So, it was another four years really until everything was back to normal. I’ve experienced a lot of crashes. I’m talking Black Monday, the dot.com bubble, the 2008 financial crisis, and of course, the 2020 pandemic.
One of the key lessons I took from all of this was that a bull market almost always follows a bear market, and that the seeds of your fortune are very often sewn in times of crisis and uncertainty.
As long as you are able to handle your level of risk and you’re buying into the stock market consistently with a diversified portfolio, then you stand a much better chance than most of making some real money.
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