By Rick Waechter, Founder

To start: I have no idea when the next stock market crash will happen. I don’t know how severe it will be, and I don’t know when the recovery will come.

But I – and you – probably know a lot more than you may think. What we know can help you minimize the negative impact on your finances.

Here’s what’s likely.

1. The market will crash. For decades, the market has not gone more than a few years without a significant fall. In the last 25 years we have had four big drops: the dot com crash (2000), the Great Recession crash (2008), the pandemic crash (2020) and the inflation-driven crash (2022). It’s been a long time (the 1960s) without at least some meaningful drop during a 10-year period.
2. There will be little or no warning. If you look at previous crashes – especially big ones -- the market was very robust until, suddenly, it wasn’t. A balloon doesn’t pop if it isn’t filled with plenty of air.
3. The cause of the crash will be unique. It always is. If it were a repeat of something we’ve seen before, no one would panic. Over-valued dot coms? Bad mortgages and dodgy mortgage-backed bonds? A pandemic? A sudden burst of inflation? We’ve seen all those, and now that they’re known threats, their possibility is priced into stocks. It’s the new problems that create real fear.
4. Plenty of people will panic and sell. Many will tell themselves the following: “I know I am not supposed to sell low, but clearly, the world has fundamentally changed. So, although I am selling low, the market will surely go lower.”
5. Many of those people will also tell themselves, “I’ll get back in when it’s safer.” Big mistake. See below.
6. Soon after the market drops, the cause will be so obvious that we’ll all wonder why we didn’t see it coming. It will be so analyzed, so logical, so talked about that we will forget an incredibly important lesson: it wasn’t obvious. Very few people will have seen it coming. If they had, the bubble would never have inflated.
7. The market will eventually recover and reach new highs. It always does. Typically, the recovery comes within a few years. Occasionally it takes longer.
8. Few people will see the stock market recovery coming until it has already happened. That’s because stock prices reflect predictions of the future, and they rise in advance of an actual turn-around in the economy or a company’s fortunes. The people waiting to get back in when it’s safer will discover at some stage the market has already gone back up – a lot. Too many will buy back into the market at a price far higher than their selling price.
9. A small number of investors will correctly predict the crash. Because there are always people predicting a crash, there will inevitably be people who call it right. If these supposed sooth-sayers are professionals, they will market their expertise (or luck) like crazy. Many people will buy their funds based on this previous success. The most successful will attract the most dollars, and they will be least likely to repeat their success. Why? The only thing harder than winning the lottery once is winning it twice. Author’s note: In some ways, they will have won the lottery twice: calling the market right once and cashing in again by charging their new fans lots of fees. Effectively, they got someone to buy their winning lottery ticket after it had paid out. Clever.

 

Here's what you need to do, in advance of the next crash.

1. Think hard about your investment plan before a crash. Commit to it 100%, or – if you determine your plan is not appropriate -- make a change now and commit to the new plan before the crash.
2. The #1 element of your investment plan is your stock/bond mix. Make sure you have enough of a cushion (bonds and cash) to ride out a crash. You determine the right cushion by considering two factors. The first is dollars-and-cents: is your cushion large enough to cover expenses for multiple years while battered stocks recover? The second factor is emotional: Can you avoid selling even when your account balance looks frightening? The more bonds and cash you own, the less frightening it will appear during a crisis.
3. When the crash arrives, put on your noise-cancelling headphones and ignore the news.

It’s not complicated. It’s just hard, at least when all hell is breaking loose. So, get ready.