According to many economist we are overdue for a market crash. If we consider historical trends, this makes a ton of sense. From 1926-2019 we’ve had a positive market about 75% of the time. For the last 9 years, the market has been essentially 100% positive. This means, if historical precedence is accurate; we can expect a few downturns in the economy pretty soon. This doesn’t have to be a bad thing however, if you’re prepared; you can actually make a profit. Today we’ll show how. These are 7 ways you can prepare for a market crash, and profit!
Definitions
Many times economist and other financial experts use a lexicon that can be a bit confusing. No worries, we’ll explain.
Market Correction – This is when the market has a 10% decline.
Bear Market – When the market suffers a 20% drop.
Crash – The market declines 35% – 60% and lasts for 3 – 6 months.
Recession – 6 months or more of economic decline.
Depression – A recession that lasts at least two years with a declined GDP 10%.
Black Swan – An event that is difficult to predict. Such as a terror attack (9/11), nuclear strike, assassination, etc.
Causes of a Market Crash
- Over-leveraged population.
An example of this is back in 2008 an extended family member of mine would brag that he was worth a few million. He had several investment properties, and had equity in all of them. But, he was over-leveraged, and when the market crashed and a few properties weren’t cash flowing; he couldn’t make all the payments and lost everything. He made the mistake of believing that the market would always continue to go up, and failed to prepare for the inevitable downward stroke.
2. Black swan events
Terror attacks, unforeseen military strike, or assassinations.
For example, when JFK was assassinated, the market dropped 2.8%. When Reagan was almost assassinated the market dropped by 1.2%. These events cause people to panic and make irrational decisions.
3. Trade/Tariff War
While Trump and china’s little trade skirmish might not cause a crash, it could cause a slight market hit. Regardless, trade/tariff wars are almost never good for the market.
4. War
Simply put war is bad for business. War creates a certain level of uncertainty, and investors hate uncertainty.
5. Bubbles
Be it the IPO bubble, the dot com bubble, or the real estate bubble of 2008. These are obvious offenders. But what might not be obvious, is what actually causes a bubble.
The main causes of bubbles are as follows:
- Lack of Paranoia
People are too optimistic and think that good times will last forever. This leads them to make decisions based on the assumption that the market will continue to be positive, when the market takes a hit, these people are over-leveraged and lose everything. If enough people do this, the market crashes.
2. Government controlled bubbles
Simply put this is “Quantitative easing”, also known as large-scale asset purchases, is a monetary policy whereby the Federal Reserve buys predetermined amounts of government bonds or other financial assets in order to incentivize banks to loan to small businesses and help the economy. This is pure market manipulation and devalues the dollar. In the long run this is horrible for the market.
How to Prepare for the Market Crash
Step 1. Understand that the market will take hits.
Historically speaking, for the past 93 years; the market has been positive for 74% of the time. For the last 10 years it’s been about 100% positive, this means we’re overdue for a hit if history is correct. If you know this, and accept this as a inevitable fact, you can prepare to win.
Step 2. Risk Tolerance
You need to be realistic with yourself and figure out how much risk you can take on. This will help you to decide what steps YOU can take to prepare for a market crash. If you’re in your 20’s you can’t afford not to be consistently investing in the market (don’t want to miss the best days, trying to time a crash). And if you’re 50+ years of age perhaps you can’t afford to be “all in” on the market.
Step 3. Have at least 15% of your net worth in cash
More people became millionaires in the great depression than any other time in american history. Look at it this way, when the market crashes, everything is on sale. You can buy stocks in solid companies, real estate, collectibles, etc… For pennies on the dollar! This is when wealth is built, if you’re prepared with cash on hand. An example of this would be; if a guy buys a house for $1.2 million when the market is up. He believes the market will continue to go up, so he continues to buy property, some that don’t even cash flow. This man is over-leveraged, when the market crashes he can no longer afford the monthly note on the properties so he’s forced to “short sale”, that when you come in and buy that $1.2 million house for $340,000. Hold it for 5-10 years and then sell it when the market comes back up for $2.7 million! You just 8x’d your money! That was a true story of a close friend, and what he did during the 2008 market crash.
Step 4. Cash in some Profits
Perhaps you have some equity in your home, consider cashing in on some of it. Or maybe you’ve got 10 investment properties, sell a few. Or even your dividend stocks, sell some. Take this extra cash and put it in your “cash fund” in “step 3”.
Step 5. Precious Metals
I’d keep no more than 5% of your net worth in precious metals. Just in case.
Step 6. Mastery
Instead of wasting time binge watching your favorite show, or reading love novels, consider investing that time in becoming the best at whatever field you are in. During times of financial stress, such as a market crash, money is tight, businesses and consumers can’t afford to waste precious cash on products or services that don’t provide the absolute best value. If you’ve mastered your domain, and perfected your product or service. You will be a sought after commodity when times get rough and money is tight. Get ready.