YES a market crash is coming...
I'm not fear mongering but rather, I'm sharing with you a predictable market cycle based on history.
A market crash could be 2020? Or 2021? Or 2022?
No one knows when but this post is to help you prepare for it especially if you are a new investor.
Investing well in a market crash is HARD!
If you haven't felt a market crash before, I've this snapshot from an investing book I read recently.
It is true, in that period post 2008, news was always pessimistic and economies were still fragile.
If you image a "green light" in a market crash to invest, then beware, it does it not exist. (highlighted in red)
Next, red what's highlighted in yellow above!
Do you think this investor would be successful in reentering the market after the crash?
Make no mistake. Most people LOSE in a market crash.
Take a look at the chart below.
The heaviest redemption comes towards the "BEAREST" of market condition.
When investors choose to redeem, funds have to sell to pay out redemption.
It's the investor's choice to sell, not the funds decision to sell.
WHY?
Having survived the 2008 crisis personally, I can share with you that every week investing into the market was bad. Every months P/L statement was worse than the month before.
Everyone is thinking they should have just given up last month instead of this month.... Me included on many times. But I held on.
I merely survived the market crash but really astute investors won big.
What's the secret sauce?
Take a guess, how many years have the markets been up historically?
Look at the chart below from Brightscope.
In 2008, markets lost 50.9% of its value in 1.3years.
Imagine investing $100,000 and having only $49,100 left with your P/L -$50,900.
This chart is to 2017 only. Some years in the bull markets are actually loss years also but not a bear market.
Different sources quote a varying degree of market loss of value and duration.
My average calculation is since 1926, markets have been UP about 75% of the time!
That means every 4 years, there's a loss year on average.
Astute investors know that well and are patient.
What caused the last few market crashes
The 2 recent historical events of crashes.
- Tech bubble was in 2000. Investors got complacent and technology shares were eventually discovered to be in a bubble.
- US Mortgage crisis in 2009: Big banks went bankrupt and investors got spooked by credit freezing situations
Source: https://slideplayer.com/slide/12720353/
Both crashes caught investors off-guard after a prolong and safe period of share price growth.
Astute investors are always cautiously optimistic. In good times, they stay skeptical. In bad times they believe things will recover.
What you can do to prepare for a crash #1) Protect your career
In my opinion, the first thing to do is to protect your income. If you happen to work in the government sector, good for you, your income is likely secure.
If you are not, then join the right company.
Some company in the right industry who will survive so that you do not get retrenched.
Also, position yourself properly in the company by upgrading your skillsets.
What you can do to prepare for a crash #2) Avoid major purchases
The most obvious major purchase is an INVESTMENT PROPERTY.
A mortgage can be $1m easily.
Safe yourself from such a liability unless you are a very experienced investor and have excess cash now.
Read ... SHOULD YOU SELL YOUR HDB AND BUY 2 PRIVATE PROPERTIES RIGHT NOW?
What about industrial property purchase which is smaller?
Same suggestion: unless you are a very experienced investor and have excess cash now.
Leads to next point on how much cash is "excess cash"....
What you can do to prepare for a crash #3) Have 20%-30% in cash
A lesson can be learnt from Warren buffett on how he utilises his cash in Berkshire Hathaway.
At all time, between 15-25% is kept as cash.
When market crashes happen, he steps up his share purchases and draws down this cash reserve closer to the 15% mark.
Plan to do the same. If you are not experienced with investing, be more conservative and keep 20% to 30% in cash to prepare for this coming crash.
Refer to the point above, it is HARD to invest in a market crash.
Instead of cashing out before or during a market crash like most retail investors, Warren Buffett stays invested and invest more.
What you can do to prepare for a crash #4) Start a regular investing plan
Yes start a regular investing plan NOW.
The reason is because it is easy to come up with a plan now to regularly get invested than during an actual market crash.
This is especially useful if you are new to investing or are under invested now.
When markets crash, your regular investing plan will consistently go into the market (maybe every month) and buy for you equities and bonds that you have identified today.
What you can do to prepare for a crash #5) Have someone with experience mentor you
Today the S&P is 2900, can you guess when S&P was 683?
It was only back in 6th Mar 2009.
Little over 10years back only. And in this period it has gone up 420%!!!
If you are new to investing, get a mentor or a professional adviser to go through with you a proper investing strategy and to set expectations right.
Can a ROBO-adviser portfolio do that?
Read ... PROS AND CONS OF A ROBO-ADIVSOR PORTFOLIO!
As long as you own the portfolio, it is still hard to take the emotion out of a market crash when you see losses. The ROBO-adviser portfolio cannot coach you in making the right choices.
It is there to execute on your choice, but if that choice is unwise, it is not there to dissuade you.
A common investing mistake scenario to share with you
I've handled investment portfolios for private clients and this is something you must see.
Below is a scenario of 2.5years of lousy performance explained by the emerging market equity sector.
Most investors lose patients after a few years of lousy performance and decide to sell to find other "HOT" investing ideas that have better recent results.
What happens after the investor sells out is a missed out on the 40% gain in 1 year.
Don't let impatience affect your investment results.
If you are new to investing, be aware that investment returns are sometimes "lumpy" instead of linearly up.
To make matters worse, the investor is lured back to the emerging market sector which is now close to the price peak. The sector is now deemed "HOT" and news start to focus on it.
What happens next after the investor re-enters is another year of bad investment performance.
Conclusion
If you want to invest successfully, the above scenario must be avoided.
Investing correctly is part of my advisory work that I do for private clients.
This sharing is for FREE but I know that not many will actually implement them.
I hope that you'll still be one of those that will adopt the 5 ways to prepare for a market crash right away and win like an astute investor.
Read ... HOW TO START INVESTING: FINANCIAL ADVISORS GIVE THEIR BEST ADVICE!
Last updated on November 9th, 2019 at 11:24 am