The stock market will collapse again. When exactly this will happen is beyond my powers of prognosis, but the fact that it will happen at some point is about as close to a certainty as you can get by investing. If you are worried about what will happen and how it will affect your family, you are not alone. You should take this worry as a sign that you are not prepared enough to handle the impact an accident will have on your finances and your plans.
With the right plan, the right financial structure, and the right outlook in place, a simple stock market crash is not to be feared. As long as capitalism itself remains intact, market crashes often bring with them the seeds of their own rebirth – such as how the bursting of the dot.com bubble laid the foundation for the Internet titans of today. The key for investors is to recognize that this is how the market works and to prepare in advance. With that in mind, here are five reasons not to worry about a stock market crash.
1. You don’t need your money invested right away
Precisely because the market can crash, the money you have to spend over the next few years should not be invested in stocks. The last thing you want to do is be forced to sell more stocks than you expected in order to cover a bill you owed. If this happens to you, you will find that you have less money to participate in any recovery that follows, thus reducing the wealth you end up with.
Instead, the money you need over the next few years should be held in a savings or money market account, on CDs, or on a high quality treasury or bond scale. You won’t earn high returns on that money, but you are much more likely to have the money you need there when you need it. Knowing that the money you need is there when you need it is a great way to weather a market crash.
2. You are not using a margin
In strong markets, the profit margin can amplify your returns and make you feel like an investment genius. However, when the going gets tough, that magnification effect works against you. Not only that, but your broker also has the right to change the terms of your margin agreement at any time for any reason. Often times, this results in making it more restrictive during a declining market, making the margin issues even bigger than they already were.
If you don’t use margin no matter what the market is doing, you can’t be forced out of your position just because of falling stock prices. It makes it much easier for both of you to get through the crash and stay invested as the market starts to rise again.
3. You have a little sock, just in case
One of the challenges you can face when the market crashes is that often there is a good economic reason for the market to fall. After all, the price of stocks is based on the expectations of the outlook for the underlying companies, and if that outlook deteriorates, their stock prices should quickly reflect that. Additionally, if a business expects less growth or active contraction, it may end up reducing the number of jobs it holds, leading to layoffs.
With an emergency fund with around three to six months of spending, you can be prepared for a temporary disruption in your income stream. This can help reduce the temptation to withdraw money from the market if your job starts to feel insecure, and give you some breathing space if you lose your job.
4. Your dividends are always paid
Although the market values stocks based on a company’s future prospects, companies typically pay their shareholders dividends based on the actual cash flow they generate today. If a company is able to maintain and pay its dividend even as its stock price falls, it’s usually a sign that its leaders believe the challenges will be short-lived and that its core remains strong.
On top of that, dividends usually come in the form of cash. This money is money you can use to consolidate your emergency fund, cover some of your costs, or reinvest in the market. Dividends during a bear market can be a great source of money to invest, as they represent cash already in your account that you haven’t had to sell or scoop up new money.
5. You acknowledge that your shares are equity interests in companies
A share of shares is nothing more than a fractional interest in a company. When you own a stock, you really own a part of that business. The market price of these shares rarely has an impact on the ability of the company to operate, profit or pay dividends.
If you loved a company enough to buy its stocks at $ 100 during a bull market, why wouldn’t you be even more excited to buy its stocks at $ 40 during a bear market? As long as its operations remain strong and its outlook remains good, a stock market crash gives you the opportunity to buy even more shares of the company for the same cash outlay. This is one of Warren Buffett’s most successful strategies, and it is a strategy that is just as available to us mere mortals as it is to the Oracle of Omaha.
Prepare for the next stock market crash
The market always goes up and down. If your financial life is structured around the assumption that stocks can only go up, you have every reason to worry about the market’s next fall. If, on the other hand, you build your plan around the factors mentioned above, you will be in a much better place to get through the next stock market crash and emerge in a better place on the other side.
A stock market crash can still be scary, but if you are well prepared for it, you will have much less reason to worry about it.