It seems like everyone on Twitter, news sites, and all around the internet is trying to predict one thing these days, the next big market crash. They know it’s coming, it’s an inevitability, and everybody wants to be the first to predict the next economic collapse or financial crisis because fear sells eyeballs.
Patrick Bet-David believes reality needs to be infused in this discussion because while market changes can be scary and hard to predict, they can be prepared for and managed.
The market has been in the positive for the past nine years. Since 1926, the market has been in the positive 74% of the time over that 92-year period. If a crash were to happen, the past nine years would be a part of a greater 12-year period of the market in order to fit that 74% positive ratio. With about three years accounting for the market being in the negative.
Next, we want to look at two things: History and Terminology. First Terminology, what do we mean by crash, bear market, recession, etc.?
Common Market Terminology:
Bear Market- 20% decline
Crash- 35% Decline (3.6 months)
Black Swan- Difficult to predict and extreme consequences
Recession- 6-month economic decline
Depression- A recession lasting 2 years & decline in GDP by 10%
We also want to look at the history of bear markets to get a better understanding of market cycles. What happens when the market isn’t in the positive 74% of the time, and how long do bear markets typically last? Drawing from history we can be better prepared for the next market crash.
So now we know some terms and history, the next question is what causes a negative market? Here are seven factors that cause crashes that we need to be aware of:
Causes of a Crash
- Money that’s only good on paper that a crash can take away in a second.
- Rich people who are really broke because their money is all tied up.
- Manipulation as a result of actions taken by the public or the government.
- Unpredictable massive event with huge consequences.
- Changing trade agreements can hit the market hard.
- Wars can be long and costly for markets.
- Sudden political upheaval can destabilize markets in a day.
- The early 2000s saw the Dotcom bubble and 2008 had the housing bubble. These are industries that grow exponentially then hit a breaking point between supply and demand and burst.
With all of this knowledge, how can we prepare for the next crash? Patrick Bet-David has 8 simple steps to prepare you for the next market crash.
8 Step to Prepare for the Next Market Crash
- We need to keep that figure of the market being in the positive 74% of the time for the past 92-years in our heads. The market will crash, and we can’t be too naïve about it with the history we have behind us.
- You need to assess your own personal risk whether you are 55 or 28. It is going to be different for your situation. You just must make a few pivots and adjustments here and there based on that.
Stay Cash 15-25%
- Cash allows you to capitalize on opportunities that only market crashes present. Take advantage of the positive market over the past nine years by being ready for great opportunities during a crash.
Avoid Major Real Estate Contract
- This does not apply to real estate investments if you keep your cash in those deals, this is about big houses. Now is the time to avoid investing in that big house, maybe even consider renting.
Cash In Some Of Your Profits
- If you have dividends cash some out, if you have properties sell a couple – It is a great way to capitalize from this nine-year market and grow your cash stockpile in anticipation for the downturn.
Precious Metal 5%
- Diversifying in precious metals is a fantastic way to prepare your wealth for a market crash and three to five percent is a healthy number.
Protect Your Career
- When the market crashes you know who is exploited? Amateurs. You know who becomes heroes? Experts. So, prepare yourself now so you can be an expert before this market crash. “Experts become irreplaceable and get elevated in market crashes.” -PBD
Call A Time Out & Study Your Portfolio
- Look at everything – cash, artifacts, stocks, bonds, mutual funds, real estate equity positions, ownership look at it all weekly. No more quarterly updates, you need to be on top of it all weekly.
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