Is a Stock Market Crash Coming? How should you prepare?

Over the Christmas holidays, we took our family to the beach for a break.

Our expectations were high. We were looking forward to perfect sunny warm weather with countless hours on the beach with our two young boys. They love the water and beach.

However, when it comes to the weather, it is so unpredictable, you never know from one day to the next what it’s going to be.

We experienced warm sunny mornings. Yet by lunchtime, the winds had picked up, making it really uncomfortable.  It was nearly blowing our kids away and one had to retreat to the comfort of the car.

As the week went on, the weather did improve to the point where we had one day that was perfect, little wind and it was warm.  On the other days, we had to make other arrangements to keep our boys entertained.  It wasn’t quite what we had expected.

You may wonder why I’m telling you this story and what does this have to do with the stock market.

Here’s the thing, the stock market is unpredictable much like the weather.

We can try to look into the future and predict it, but nobody, not even the experts have any idea what’s going to happen.

The one thing we know is that markets are capable of going up and down and the long trend is up.

So, is there a Stock Market crash coming?

Here’s the thing, no one has any idea, including the experts.

If the so-called experts knew, my guess is they’d be on some remote island living the life and drinking pina coladas.

In the last months of 2017 and early 2018, the Dow Jones, the US Index set new records. While the Australian market continued it’s strong run.

As I am writing this, markets have taken a downward move over the end of Feb 2018 and the start of March 2018.

So, what’s going to happen from here?

No one knows that answer to this question.

If we look back in history, we experience a stock market correction/crash every 7 years. This suggests we will experience one not far into future.

As markets continue to reach higher, people experience FOMO ( Fear of Missing Out).

People jump in at the top with the fear of missing out on any potential gains. The smart money knows better.

Rules to follow depending on your stage in life.

30-40-year-olds:

You have plenty of time on your side. There’s no need to worry about what the stock market is doing. You are likely investing for a long period of time.

Key here is not to panic when something happens.

If you are regularly investing, take advantage of dips in the market and buy good quality investments.

Compounding is your secret weapon here!

If you are worried, start building up cash levels a bit and go shopping when markets correct. They will correct, it’s a matter of when.

40-50-year-olds:

If you are investing, it’s likely to be for your future. Placing yourself in a position where you can retire on your own terms or have more options available to you.

If this is the case it’s likely you are going to be investing for a long period of time.  My advice here would be to check your risk levels.

Let’s say you are comfortable with 70% invested in shares and property but you happen to be at 80%. I would suggest taking some profits.

No harm in realising profits.  Don’t let greed get in the way.

Keep investing on a regular basis. You’re investing so this money lasts 10, 20, 30 or even 40 years.

If you want to take the conservative route, perhaps build up your cash levels and go shopping when the market corrects.

50-60-year-olds:

This is the prime time of your life.  It’s likely you have less financial commitments with your children as they are grown up.  You have a little more income to play with while you are decreasing your mortgage.  It is also the point in time that you start thinking about what else you can do to increase your pool of assets to build up your retirement funding.

If this is you, perhaps re-assess your risk levels, the amount of risk that you are comfortable with.  Continue to invest on a regular basis, or take a bit more of a conservative approach and build up your cash levels a little to take advantage of any downturns in the sharemarket.  If you are approaching retirement or needing to rely on your investments for income, re-assess your risk levels and start building up a cash buffer.  I like to have 2-5 years worth of income in really conservative assets like cash and term deposits for clients.

In the event of a stock market correction, they can manage without realising their growth investments at depleted values.

Retired or close to retirement:

This is the critical point for most.  When we go back to the Global Financial Crisis, many people had major shocks in their investment portfolios.  For many looking at retirement around 2007, they had to reconsider their options due to the impact on their investment portfolios and super accounts.

It’s what we call sequencing risk.  One of the biggest risks someone approaching retirement faces.

That is the event of a downturn in investment markets at retirement or the critical period, 5 years prior and 5 years post retirement.  Given no one knows what is going to happen with investment markets, it’s wise to plan for as much as you can.

If you are approaching retirement I would suggest that you re-assess your attitude towards risk.  It’s likely not to be as high as it was at the peak of your working life.  Start to put some funds in cash/term deposits.  Yes I know, the rates are not great, but it’s better than losing it when markets correct.  It’s all about managing risk.

For clients approaching retirement, I like to aim for approx 2-5 years worth of income be directed to cash or term deposits.  Depending on the amount you draw down as income this should be enough to sustain you through any downturn in investment markets, allowing you to give you every opportunity to recover.  We saw this with the Global Financial Crisis.

Many of our clients who listened to our advice managed through the Global Financial Crisis without any impact on their lifestyle.  Don’t get me wrong many panicked and wanted to sell out, but with the right guidance from us they remained invested and now reap the rewards of sticking to their strategy.

My advice to everyone is to understand that depending on what stage of life you are at, there are going to a number of market corrections and shocks.  Be aware of this and be prepared when it comes.  It will define what you do, either panic or embrace it and take advantage of investments being on sale.

Warren Buffet says it best ” The stock market is a tool for transferring money from the impatient to the patient”

One of the biggest mistakes I witnessed people make prior to the Global Financial Crisis was being overconfident.  They increased their risk levels beyond what they were comfortable with and suffered when the correction came.

I’m finding that again, clients are getting overconfident with investment markets thinking they will continue up in one straight line.  Don’t get overconfident, it will be your downfall.  Understand the rules of the game and you will survive.  Don’t take on any more risk that you are comfortable with.

Hope this has been useful.  It’s not to say we are going to have a stock market correction because no one knows when that will come.  What we know is the longer the markets continue to hit new highs, the more likely we are closer to market corrections, and they will come and go.

What’s more important is how you are going to manage it when it comes, panic, be prepared or embrace it and go shopping.

Happy investing!!

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Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth

Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Glenn Doherty and Jigsaw Wealth Pty Ltd are Authorised Representative of Exelsuper Advice Pty Ltd, ACN 080 419 745, AFSL 428272. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at June 2017. This is an online information blog. It does not imply an offering of securities.