How to Prepare Yourself for the Next Stock Market Crash?

Sudhan P.

According to data from America’s National Bureau of Economic Research, the average duration of a full market cycle (from peak to trough to peak) happens every five years or so. From 1945 to 2009, there were 11 such cycles. Since the market rally from the depths of the great financial crisis in June 2009, we have not seen a major crash happening, except for small scares here and there.

With 2019 – which is next year – marking the 10th anniversary since the 2009 recovery, are we overdue for a market crash soon? No one knows for sure, but what we can do is to prepare ourselves for the next stock market decline when it happens. It is not a matter of if but when the market will crash. Stock markets don’t rise in a straight line – over the long-term, the markets have delivered strong gains, but in between, there have been severe ups and downs.

Have some opportunistic funds

I am a firm believer in having some money set aside and not being fully invested in the market at any one time. Having some spare cash allows us to take advantage of the opportunity a stock market crash can bring.

During the 2008/2009 great financial crisis, the Straits Times Index (SGX: ^STI) plummeted by some 60%. Many wide moat companies fell hard in price too. If one had the funds and the courage (more on that later) to buy those companies on the cheap, he or she would be sitting on huge gains now.

The funds can also be used to buy more of the companies we already own. In his “16 Rules For Investment Success“, legendary investor Sir John Templeton, whose Templeton Growth Fund posted a 13.8% annualised return from 1954 to 2004, had this to say:

“Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.

Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would.”

The most recent stock market crash gave a once-in-a-lifetime opportunity to load up on stocks. We will not know when such a crash of a similar magnitude will happen next, but if it happens, we need to have the money to act.

Have a shopping list with the exact trigger price

When the stock market crashes, it might be tough to press the “Buy” button. Therefore, we should always perform research on the stocks we like beforehand and list the price that we would be comfortable to buy them at.

Also, with such a shopping list, we would have a sound mind on the exact stocks we wish to add to our portfolio, instead of being side-tracked by the various opportunities the market presents.

Most importantly, take action during a market crash

We can prepare all we want, but during a stock market crash, if we don’t act, all the preparations would become futile. The shopping list that we have on hand would come in real handy for us to act from a logical perspective instead of having our emotions drive our actions.

We will not know for sure when the market would bottom during a crash, but if we invest a certain amount every few months consistently as the market declines, we would have bought stocks at a reasonably low level. To prevent yourself from running out of your opportunistic funds when the next crash happens, you can use the framework written here by a fellow Fool.

Always bear in mind that the stock market and the economy has a cyclical element in them. When you take action during a downturn, you would be rewarded handsomely during the upturn.

The Foolish takeaway

Warren Buffett once said that we have to be greedy when others are fearful. Successful investors became great due to the actions they took during stock market crashes. They saw such crises as an opportunity to buy stocks cheaply. Hopefully, the above steps would help us to prepare ourselves and be greedy when the world is panicking during the next market crash.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn't own shares in any companies mentioned.