Over the past several years, the market has climbed to historic highs, prompting analysts to sound the alarm over the next stock market crash. While I can’t say when the next crash will occur, I can say it’s reasonable to assume that there will be another stock market drop at some point. How can you prepare for it?
Market crashes are inevitable
Crashes are more about the speed of decline than its depth or duration. The Flash Crash of 2010 saw the market plunge 1,000 points in minutes. In the 2008 crash, the market fell more than 20% within days (and ultimately dropped around 50%). The good news is that each time the market crashed, it fully recovered and went on to greater gains. In 2010, it took a couple of days to recover, while in 2008 it took about 17 months. Past performance is no guarantee of future returns.
Every bull market (market rally) leads to some sort of correction. Corrections are defined as declines of 10% to 20%, and they are very common during extended stock market rallies. They may last from a few weeks to a few months. A bear market is when stocks decline more than 20%, with a duration of more than 15 months.
Patience and discipline beat fear and panic
The key takeaway is that crashes, corrections, and bear markets are all parts of market cycles. These events are even healthy for the long-term trajectory of the market. So while it’s scary to watch your portfolio lose a significant portion of its value, keep in mind that these are only paper losses. These losses don’t become real until you sell. (That’s why it is important to move out of the market if you need your money in the short term, and don’t have time to recoup potential paper losses.)
If you have a solid, long-term investment strategy, your patience and discipline should pay off over the long-term. A properly diversified portfolio should be able to weather most storms, given enough time. For more on how to prepare your portfolio for a market crash, read this: Profile-Financial.com/diversify
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published August 14, 2017. Updated February 2022