How to Prepare for a Stock Market Crash

There have been whispers that a market crash may be looming overhead again, maybe you’ve heard the whispers.

Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason says, “If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent.”

Leading up to the Presidential election, the “Trump Rally” has been great for stocks.

The Dow has soared 13% since Election Day, and all three major indexes have since closed at record highs. But some observers are starting to wonder if soaring highs mean a stock market crash is coming. On the campaign trail Trump touted promises of increased infrastructure spending, reduced taxes, and loosened regulations.

John C. Bogle, the founder and retired chief executive of The Vanguard Group postulates:

I think [the market boom] is driven more by near-term hopes for big budget cuts, big tax cuts, particularly corporate tax cuts… and the market likes tax cuts. And then there is a feeling of bullishness in the air. Don’t ask me quite why”, says Bogle, “but when the feeling and emotions are out there, they override the feeling in the market. But in the long run, believe me, it is one hundred percent economics and zero percent emotions. The record of the last century shows exactly that.

And while the market may be up now, according to Bogle, the Trump administration is bad for morale.

“Trump’s overall vision for America—such as a tougher stance on international trade and a tilt toward more nationalist foreign policy—would be detrimental to prosperity over time, Bogle said on “Squawk on the Street.” He worries about the division of wealth in the country, inequality, racial division, and our backing away from Europe and barriers to world trade.”

Of course, no one can predict with certainty a stock market crash, but those who are informed and prepared (as much as one can prepare), will fare better in the wake of a market crash. A survey found that 62 percent of investors whose advisors have talked to them about a crash believe their loss would be less than what their stated exposure to equities would suggest.

Here are a few ways to prepare for a market crash.

Accept that down markets are always a possibility

Stock markets crash from time to time. The timing of a crash may be surprising, but the fact of a down market should never take you by surprise.

Examine your asset allocation

A Forbes article advises, “It’s during a bull market that we should ensure that our asset allocation is both realistic and aligned with our financial objectives. The goal is to have in place an investment plan that we can stick with during a down market.” The worst time to make significant changes to your stock and bond allocations is when equities are in free fall.  

Monitor each fund

Monitor each fund carefully, especially mutual funds or ETF. In fact, studies have found that investors in index funds were more likely to stick to their investment plan in difficult times than those who invest in actively managed funds.

Follow the five-year rule

A golden rule for stock investment is not to invest any money in the market that you will need over the next five years. This is especially true for retired individuals and those relying on their investments for daily living expenses. Forbes says, “With at least 5-years worth of expenses out of the market, an investor is more likely to weather a bear market knowing their immediate needs are taken care of.”

Finally, Bogel advises, “Don’t be swayed by the waves of emotion that drive the stock market. He says, invest for the long term and forget the “momentary distractions of what Trump is saying at one news conference or in one tweet.”

 

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