If There’s a Stock Market Crash, You’ll Want to Prepare
Is a stock market crash on the horizon? Stock prices keep climbing right now, but several experts say the bubble is due to burst soon. But don’t despair – there are steps you can follow to weather the storm. Some are sound no matter what the economic climate is.
Why Might the Stock Market Crash?
Overall, stock prices have been trending upward for about 14 years. What’s more, the hype surrounding AI (artificial intelligence) has recently goosed them even higher. The typical “bull” market – so-called when stocks keep increasing in value – lasts around five or six years.
Several economists say the stock market is overdue for a “correction.” That sees the prices of stocks go down – sometimes steeply – to put their value more in line with the earnings of the corporations that issue them. That price-to-earnings ratio is currently about twice the average of the last 150 years, and even greater than just before the stock market crash that preceded the Great Depression.
And since investors have been pumping more air into the balloon for longer, many experts say the bust –a stock market crash – will likely be a big one. One expert said the S&P 500 could drop as much as 82 percent. Others say markets will lose between 50 and 70 percent of their value, but whatever the exact number, several economists expect a major drop.
What Should You Do Before – and During – a Stock Market Crash?
There is one step you should take no matter what the market is doing – diversify. It’s vital that you put your money in a variety of investments, so if one area suffers, others are safe. A diverse portfolio can include stocks, bonds, cash, as well as possible alternative investments such as real estate, precious metals, fine art, and oil and gas projects, among others.
Another way to “invest” is to pay off your debt. Eliminating high-interest debt – like credit card debt – essentially gives you a high rate of return on the money you put in.
Don’t Panic
Especially if you’re younger, bear in mind that the market will go up again eventually, and probably sooner rather than later. Stocks generally rise to return their earlier prices, and beyond. Many investors take advantage of low prices resulting from a stock market crash to invest more – called “buying the dip.” If you decide you want to try that, make sure you have the cash to spare first. That means having your expenses covered, plus money put aside for emergencies.
Somewhat related to buying the dip, you may want to consider converting your regular IRA to a Roth IRA while values are down. With this timing, you reduce the amount of conversion. Therefore, you reduce the tax bill for doing it.
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Curious about previous stock market crashes? This timeline shows crashes over the last 200 years.
Some consider these investments recession-proof.
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