For whatever reason I love watching really weird YouTube videos. Lately, I have been fascinated by people who claim that there are secret bank accounts held by the Federal Reserve that are in each of our names. Of course there are no secret accounts, but that doesn’t mean I am not fascinated by these videos and why people think this way. A corollary to these videos are those that are predicting doom and gloom in the stock market. These prognosticators are forecasting a stock market crash that will be the worst in our lifetime; even worse than the 2008 stock market downturn.
As I watch these videos it did get me to thinking though. Over the past 8 years we have had a great run in the stock market. It is currently the 2nd longest bull run that we have ever had. The longest was 1989-2000. So we have another 2 years to go to eclipse that market. But as the stock market goes higher and higher there are those that wonder, including myself, when the party is going to stop. Bull market and bear markets are par for the course for those who invest for the long-term. I know that a bear market will probably come in the next couple of years. And I also believe we are in the middle of a long-term secular market where market returns will be excellent over a long-period of time, typically 15-20 years.
Considering my viewing of these videos, the long-term nature of the current bull-market, and the probable end in the near future I thought I would delve into the question of what does it mean for the stock market to crash?
A Stock Market Crash
After doing some research it seems that there are different definitions for what constitutes a stock market crash. And there are also some conflation of terms. Personally, I like The Balance’s article on stock market crashes. A stock market crash is where the market goes down precipitously, at least 10% over a day or two. Perhaps, the two most famous stock market crashes were in October of 1929 and in October 1987. In 1929, the market dropped over 25% over 4 days. In 1987, the market dropped 22% in ONE day. Of course, both times it caused panic in the stock market. The difference between 1929 and 1987 is that in 1987 the market actually recovered fairly quickly, where in 1929 it took almost 16 years to go back to all-time highs.
Stock market crashes are fairly unusual, but they can occur. In 2010, the stock market had what was called a Flash Crash. The Flash Crash was where the market went down 9% within 36 minutes. It was attributed to a computer glitch and the market recovered what it had lost within a couple of days. Within the increases of technology involved in the stock market it is somewhat surprising that we haven’t had more of these flash crashes.
No matter what a stock market crash can be a disconcerting experience that I know has scared people out of the market, particularly today when many people speculate the market it too high.
What Do You Do to Prepare?
I mentioned before that there are different definitions of what is considered to be a stock market crash. Some articles I read considered a stock market crash to be where the market drops 30% more over a period of time. For me that isn’t a stock market crash, but merely a bear market. Bear markets are NORMAL in the world of investing and constitute a loss of 20% or more from one point to another. The last bear market we had was from October 2007 to March 2009. In that market, the S&P 500 lost over 50%. The stock market during the Great Depression was 89%. So bear markets can be devastating and I am not saying they are a problem.
So what can you do to prepare for a stock market crash or even a bear market?
Well, you could stop investing and put your money in your mattress. I mean that would prevent you from losing any money, but inflation will eventually eat the purchasing power of that money.
The truth is you can’t really do anything about a stock market crash if you are serious about investing. They are fairly random events. We don’t know when they will come. The only thing I would say to you is to keep yourself invested because the market, I believe, will eventually recover because it always has.
However, the answer for a bear market is a little different and it depends on several factors. For example, it might depend on your age. If you are nearing retirement age then a huge bear market loss like in 2007 could prevent you from retiring. You might have to wait a few years to get your money back.
Another factor is your risk tolerance. How much risk can you tolerate? In other words, how much money are you willing to lose? Does investing cause you to lose sleep over night? I think I can stomach quite a bit of risk. Even though I was really scared in 2008 when the market went down 37% I stayed in. I didn’t cash out anything, but I will admit I thought about it. Looking back on it I think that was a great experience for me. It gives me a little perspective. If I can survive that period of time I can most likely survive another bear market or two which will surely come in my lifetime, if not more.
Another factor would be your exposure to stocks. How much of your investment portfolio is invested in stocks? Part of that is dependent upon your age and your risk tolerance. Because I am fairly young and tolerate a lot of risk I have almost 100% exposure to stocks. Most financial people would tell me to reduce my risk a bit. Maybe make it 80%/20% or 70%/30%. That would be 80% stocks and 20% bonds. The more exposure to bonds you have the less money you will lose. Bonds can be an important part of your portfolio that can smooth the ride a bit. My rationale for a 100% stock exposure is because of my youth and risk tolerance. However, if you are closer to retirement age or would like a little less risk you might put a lot more bonds into your portfolio.
I actually plan on doing so as I get closer to after I hit the age of 50. Right now I am in the accumulation stage of my investment life. I am not necessarily about preserving my nest egg. However, there will come a time when I probably will have less exposure to stocks (e.g. 75%) and put the rest in bonds or even annuities (another post for another time).
The Bottom Line: A stock market crash is an unpredictable event. And there are tons of folks who are predicting a stock market crash in the near future. I have no doubt that we will probably have a bear market in the next couple of years. In fact, I think it will happen in the next year or so. But I am not a market prognosticator. I don’t try to time the market. I just keep putting money in. Losing money sucks. I don’t like to lose money, but living through the bear market of 2007-09 prepared me well, at least mentally, for the next downturn.
At the same time, that doesn’t mean people shouldn’t prepare. They should look at their investments; determine their risk tolerance; consider their retirement age; and also put money aside for a recession that often will come with a stock market downturn. Paying off debt might be a good strategy to deal with a market downturn.
What do you think? Will we have a stock market crash soon? What about a bear market? What would you advise those to do to prepare for the inevitable downturn in the market?