Make no mistake, a market crash or major correction is coming! I don’t know when or how big it will be but I do have some ideas for how to survive.
The current US-led bull market in stocks started way back in 2009 (twelve years ago) and was only temporarily punctuated by the coronavirus correction in March 2020. A major crash is coming but I can’t say when or how big it will be. However, I can suggest some ways to prepare.
What Is a Market Crash?
Investopedia defines a market crash as “a sudden and significant decline in the value of a market.” Although there is no numerical definition of a crash, Wikipedia suggests that the term “commonly applies to declines of over 10% in a stock market index over a period of several days”. If prices decline more slowly over a longer period of time, it’s a “bear market” rather than a crash.
How Can You Prepare for a Market Crash Right Now?
There are at least five things you can do as a market participant: buy, sell, hold, sell short, or sit on the sidelines. Each of these could have a part to play in surviving the next market crash.
Buy: It’s a brave investor who buys when a crash is coming, but you’ll lose no money if the market rises by another 20% before it crashes by 25%. Mitigate your downside risk with a protective stop order.
Sell: I’ve already exited the equity investments in my retirement account, so my potential loss is only the opportunity cost of not benefiting from any rise before the fall.
Hold: You could simply hold your existing investments to collect any dividend income irrespective of the markets’ up and down movements.
Sell Short: I’ve already suggested shorting US indices as a way to benefit big from a coming crash but this technique is definitely not for amateur investors.
Sit on the Sidelines: If you’re not currently invested, you could stay on the sidelines but still open a demo account with a broker to gain valuable experience until the time is right to invest.
Markets Price Targets
I don’t want to scare you but the Dow Jones Industrial Index lost 90% of its value in the three years following the 1929 Wall Street Crash, the DJIA fell by almost 23% in one day in the Black Monday crash of 1987, and the stock market lost more than 50% of its value in 2008. Don’t get me started on the dot-com crash.
Where Can You Take Market Crash Survival Action Today?
To buy stocks or stock indexes, or to sell them short, you’ll need a broker. To practice in a demo account, or to fund an account ready to pick up some post-crash bargains, you’ll need a broker. These are the best brokers we know:
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