Every time the stock market dips — even slightly, the bears come out. You see them on the cable business channels, warning, with a wild look in their eyes, of a “stock market crash.”
But then you look at your portfolio and note that we’re in the middle of perhaps the greatest bull run in history.
Plus, we’ve got low interest rates, an economy firing on all cylinders, and a business-friendly administration in the White House. The Dow Jones Industrial Average recently hit 27,000 for the first time ever — and remains near record highs.
But the bears have a point.
As sure as you can count on the moon and the seasons moving in cycles, you can count on the stock market moving in cycles. It’s been doing it for hundreds of years. Times of economic boom and soaring stock prices are followed by times of economic bust and plummeting stock prices.
The pattern has been repeating itself since the founding of the United States.
Economic recessions… real estate busts… stock market crashes… wars… financial shocks. These aren’t aberrations. In fact, they are common occurrences. A quick tour of American history shows how this is the case.
During the 110 years from 1900 to 2010, we’ve had…
- The Great Depression
- Two world wars
- More than 30 bear markets (market drops of more than 20%)
- The runaway inflation of the 1970s
- The savings and loan crisis of the 1980s
- The 2000-’02 dot-com crash
- The 2007-’08 financial crisis and resulting Great Recession
That’s not even mentioning the 22 other “run of the mill” recessions that cropped up along the way. Any student of economic and stock market history will tell you that massive financial shocks and stock market crashes happen a lot more often than most people think. In fact, you should expect to see at least one economic shock and bear market per decade.
With this in mind, let’s go back to 2007… right before the stock market crashed.
The 2008 Financial Crisis and Stock Market Crash
In 2007, we had a strong recovery after a crisis. We had excessive levels of debt.
If that scenario sounds familiar, it’s because the current economic and stock market climate has some important things in common with the one in 2007.
We’ve recovered from a crisis and enjoyed years of good times. Student debt, consumer debt, and risky corporate debt levels are very high. And just like in 2007, stock valuations are near record highs. While the stock market could continue rising for months or even a year or more, it makes a lot of sense to create or review your plan for surviving a bear market. History shows it’s just a matter of time before one strikes.
While I don’t think we’re going to get a “whopper” like the 2007-’09 stock market crash anytime soon, a relatively mild drop of 25% or so is overdue.
So what should you do to prepare for the next stock market crash?
Smart investors prepare themselves for all possibilities — especially when their retirement savings are at stake. Even a relatively minor market dip of 20% could set your retirement back several years or more. That’s why I’ve put together this three-part plan to insure your investments if the stock market plunges.
Knowing about and using these strategies could mean the difference between having an abundant retirement and barely getting by in your old age.
Bear Market Survival Strategy #1: Diverse Asset Allocation
Of all the concepts that can help you survive and thrive during tough times and full stock market crashes, few are more powerful than “asset allocation.”
Intelligent asset allocation means you don’t bet the farm on a single stock or a single asset class. Intelligent asset allocation can prevent you from suffering catastrophic losses.
Consider people who went “all in” on real estate in 2005 and ‘06. Back then, the U.S. real estate mania was in full force. Real estate was a “can’t lose” bet. Many people put all their savings into real estate and even took on loads of debt to “leverage” their returns.
When the real estate market crashed, these all-in real-estate players were wiped out. At the heart of their downfall was poor asset allocation. They bet the farm on one asset class and it was a bubble.
There’s no “one size fits all” asset allocation strategy that is right for everyone.
However, most of us have similar end goals. We want to own a diversified collection of assets that throws off lots of income… even when we are not actively working. We want to buy high-quality assets for bargain prices. We want our portfolio to be crisis-proof and inflation-proof.
Bear Market Survival Strategy No #2: Buy Some Gold
There are hundreds of wealth-insurance policies out there. They involve intricate details, lots of forms to sign, and payments of big fees to advisors and salesmen (which are often the same thing).
But I’d rather keep things simple and keep money in my pocket instead of a salesman’s pocket.
Put a small portion of your wealth in gold bullion.
People would likely flock to gold in a global financial disaster or stock market crash and cause its price to soar. For example, the 1970s were marked by war, recession, and high inflation. This made the 1970s a terrible decade for stocks and bonds. But it was terrific for gold owners. As people fled stocks for precious metals, gold gained more than 2,000% during the decade.
Stocks Zig, Gold Zags : The rolling two-year investment returns of the S&P 500 and gold
The good news is that you don’t have to buy a huge amount of gold to have a good insurance policy. You can place just 5% of your portfolio into gold.
Gold’s place in your portfolio could be the difference between your family struggling to get by and or doing well.
Bear Market Survival Strategy #3: Invest for the Long Term
Finding real stock market bargains is usually difficult because financial markets correctly price most assets most of the time.
However, a crisis creates massive empire-building opportunities because it introduces tremendous amounts of emotion into the financial markets.
A crisis creates panic. When people panic, they dump their ownership stakes in stocks, bonds, real estate, and commodities with little regard to their real values or ability to produce income. They sell first and ask questions later. This creates huge declines in asset prices and huge volatility.
This, of course, means that if you can keep your head while others are losing theirs, you can buy assets at fire-sale prices.
For example, the wake of the 2008 credit crisis was an amazing time to buy business like Apple Inc. (NASDAQ:AAPL), Altria Group (NYSE:MO) (the world’s largest cigarette maker), and Starbucks (NASDAQ:SBUX). Apple tripled in value off its 2009 bottom in less than two years. Altria doubled off its bottom in about two years. Starbucks more than tripled in value off its bottom in about two years.
During a financial crisis, essential assets like factories, skyscrapers, mines, oil fields, farms, pipelines and power plants don’t dry up and blow away. The only thing that changes about these valuable, lasting assets is who owns them.
The financial markets are like a chess game. During a crisis, the ownership of essential assets moves from weak players to strong players.
One More Way to Prepare for the Next Stock Market Crash
As I mentioned at the start of this report, it’s just a matter of time before we experience another bear market or full stock market crash.
That’s why I’ve spent the past year and more developing Bear Market 2020: The Survival Blueprint.
This book is full of hard-won knowledge and more advanced strategies than the ones I’ve shared with you so far. I’ve tested these tactics in the bloody trenches of firsthand investing, and in it I tell some of my “war stories”… and prove these tactics work. Part “diary” and part “owner’s manual,” Bear Market 2020 takes you by the hand and walks you, step-by-step, through the six tactics that will help you and your family navigate America’s next bear market.
History shows that it’s only a matter of time before the next financial shock. So if you’d like to insure you and your family’s financial well-being from a stock market crash, this is the perfect book for you.
Eric Fry is a 30-year international finance expert, former hedge fund manager, and InvestorPlace’s resident expert on global investment trends. He founded his own investment management firm and served as a partner several others. In 2016, he won the Portfolios With Purpose stock-picking contest – Wall Street’s most prestigious investment competition – making him America’s Top Trader. With Fry’s Investment Report, Eric’s goal is to track the world’s biggest macroeconomic and geopolitical events – and help investors make big gains from those emerging opportunities. Click here to learn more.
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