B.Between war in Europe, inflation in the US at 40-year highs, and port jams creating chaos in supply chains, there are plenty for investors to worry about right now. Any of those problems could cause confusion in the market. All three together provide a key reason why investing has felt a lot like walking on eggshells of late, even if the market has come back a bit in March.
With that backdrop in mind, the answer to the question of whether the stock market is going to crash again is simple. Yes, it will crash again. The real questions, however, are “when will it crash?” and “what can you do about it?”
The hardest question: when will the market crash again?
While it wasn’t exactly hard to predict that 2022 could turn out to be a challenging year on the market, a key reason the stock market is open most days of the week is that nobody Really knows what is going to happen. The buying and selling of stocks is what drives market movements, and the emotions of the day can rule long-term fundamentals for quite some time.
That makes forecasting when the next market crash will happen good for generating clicks, but not so great when it comes to trying to make changes to your portfolio. just before this crash happens. If you are wrong and the market continues to rise, you will miss out on significant gains. Even if you get it right, you’ll likely still be exposed to a hefty tax bill. That could take away a lot of the money you’re trying to protect in the first place.
Even if you predict when the market will collapse again is a very difficult thing to do, recognize that it will crash at some point and still provides a very valuable investment framework. Planning around that distinction between either Y when crash will occur, you can find a breakeven point that works in most market conditions. In essence, with a decent strategy, you can set yourself up for long-term growth while protecting yourself from the short-term pain that crashes bring.
What can be done with a market that will collapse at some point?
Because you can be pretty sure the market will crash but you can’t be sure when it will, you need to set up your finances so that you don’t need to rely on stocks to cover your short-term costs. That means you’ll need an emergency fund for three to six months to cover your costs temporarily if your other sources of income unexpectedly dry up. It also means you’ll want about five years of the expenses you expect your portfolio will have to pay to stay in safer investments than stocks.
That doesn’t mean five years of your total living expenses, unless you really plan to cover 100% of your expenses from your wallet. If you’re hoping for a fairly reliable pension, Social Security, salary, or some other source of cash to cover some or all of your costs, you don’t need that five-year margin for expenses that will handle those things.
The trade-off you face is that money in more conservative investments like bonds, certificates of deposit, or cash will likely earn lower long-term returns than money in more aggressive investments like stocks. As a result, there is a balancing act that you have to manage with that more conservative money.
You want enough of a cushion so you can ride out a typical bear market without being forced to sell your stock to pay your bills. At the same time, he doesn’t want to invest so conservatively that he loses the ability to reap the potential growth to cover his long-term costs as inflation rears its ugly head.
That’s what makes five years a decent goal. If you have enough saved to be able to retire at some point for about 20 years, it means you can still keep a large enough stockpile to help with those later years. At the same time, if the market crashes early in your retirement, you have that protection to give your portfolio a chance to recover before you need to sell your shares.
Start implementing your plan today
With a decent emergency fund and a reasonable expense cushion, you can give your stocks the best chance to work their long-term magic, while you can still handle the short-term pain of downturns. It’s a wonderful place to be if you expect the market to crash again at some point, but you’re not sure when exactly that will happen.
Recognize that it will take time to get your finances to the place where you can ride out a typical market crash and come out stronger on the other side. So get started now and improve your chances of being ready the next time the market crashes.
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