The stock market will break again. When exactly this is going to happen is beyond my ability to predict, but the fact that it will happen at some point is the closest to the certainty you can have in investing. If you are concerned about what will happen and the effect it will have on your family, you are not alone. You should take this concern as a sign that you are not prepared to deal with the impact that an accident will have on your finances and plans.
With the plan, the financial structure and the right prospects in place, a mere market crash is nothing to worry about. As long as capitalism itself remains intact, market crashes often carry the seeds of their own rebirth – as the dot.com bubble burst laid the groundwork for today’s Internet titans. The key for investors is to recognize that this is how the market works and to be prepared in advance. With that in mind, here are five reasons not to worry about a stock market crash.
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1. You don’t need your money invested right away
Precisely because the market may break down, the money you need to spend in the years to come should not be invested in stocks. The last thing you want to happen is to be forced to sell more shares than you intended to cover an account you have to pay. If this happens to you, you will find that you will have less money participating in any recovery that follows, thereby reducing the wealth you will have.
Instead, the money you need for years to come should be kept in a savings account or money market, on CDs or in a portfolio of Treasury bills or investment grade of corresponding duration. You will not have high returns on that money, but you will have a much better chance that the money you need will be there when you need it. Knowing that the money you need is there when you need it is a great way to cope with the collapse of the market.
2. You are not taking advantage of the margin
In strong markets, leveraging your margin can increase your returns and make you feel like an investment genius. When things go sour, however, this magnifying effect works against you. In addition, your broker also has the right to change the terms of your margin contract at any time and for any reason. This often translates to making it more restrictive during a falling market, which would make any margin challenge with even greater problems than it would have been.
If you are not using margin, no matter what the market does, you cannot be forced out of your position just because of falling stock prices. This makes it much easier for you to survive the accident and keep invested while the market goes up again.
3. You have a little punch, just in case
One of the challenges you may face when the market crashes is that there is often a good economic reason for bringing the market down. After all, stocks are priced based on expectations from the underlying companies’ prospects and, if those prospects go sour, stock prices should reflect that quickly. In addition, if a company expects less growth or actively shrinks, it may end up reducing the number of jobs it has, leading to layoffs.
With an emergency fund with about three to six months of expenses, you can be prepared for a temporary interruption in your income stream. This can help you reduce the temptation to withdraw money from the market if your job starts to become unsafe, as well as give you some breathing space if you lose your job.
4. Your dividends are still being paid
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Although the market sets share prices based on the company’s future prospects, companies generally pay dividends to shareholders based on the actual cash they are generating today. If a company is able to maintain and pay its dividends even when its stock price drops, it is usually a sign that its leadership believes that any challenges will be short-lived and that its core remains solid.
In addition, dividends usually come in the form of cash. This money is money that you can use to support your emergency fund, cover some of your costs, or invest back in the market. Dividends during a bear market can be a great source of money to invest, as they represent the money already in your account that you did not need to sell or stock up on new money to have available.
5. You acknowledge that your shares are interests in companies
A share is nothing more than a fractional shareholding in a company. When you own shares, you really own part of that business. The market price of these shares rarely has any impact on the company’s ability to operate, profit from or pay dividends.
If you liked a company enough to buy your shares at $ 100 during a bull market, why wouldn’t you be even more excited to buy your shares at $ 40 during a bear market? As long as your operations remain solid and your prospects remain decent, a market crash gives you the opportunity to buy even more shares in the business for the same cash outlay. It is one of Warren Buffett’s most successful strategies, and it is as available to us mere mortals as it is to the Omaha Oracle.
Get ready for the next market slump
The market always goes up and down. If your financial life is structured around the premise that stocks can only go up, you have every reason to be concerned about the next market crash. If, on the other hand, you build your plan around the factors mentioned above, you will be in a much better place to survive the next market crash and emerge in a better position on the other side.
A market crash can still be scary, but if you are well prepared for it, you have much less reason to worry about it.