Market Crash 101
I get this question quite often, and it’s an interesting one so I wanted to detail my thoughts.
When the crash happens you won’t see it coming, and it could start in any part of the market. Property, stocks, bonds, commodities — anywhere. In terms of definition a crash needs to be a significant downturn i.e.
- -10% = correction
- -20% = bear market
- -35 to -60% = crash
A crash can last for a long time, the last crash took roughly 18 months to run its course! They usually happen every decade, and guess what, we’re due another one.
Common Signals
Let me repeat, you won’t see it coming. But when people get nervous money will flow into Gold (and other commodities), USD and potentially cryptos. It’s not a bad idea to add some of these to your portfolio but you could be holding for a long time.
Hedge
So how can you hedge something that you can’t see coming? Diversify your portfolio across instrument types, industries, geographies, time (dollar-cost averaging), and grow your ability to be patient. Certain stocks are also considered safer in crashes, although this depends on the type of crash and if you don’t know when a crash is coming you probably don’t know what type of crash is coming.
A high-risk hedge approach, if you’ve got the money and belly for it, is to short the market once it becomes obvious that the market is crashing. The issue with this approach is that you’re betting that the market could continue down — there is always the chance that it suddenly swings! Tread cautiously here.
Take Action, or Not!
Crashes are characterised by panic selling across a huge number of investors, everyone suddenly wants out. But did you know that if you’d invested $10,000 in the S&P500 in 1970, and done nothing but hold you’d have $919,664.22 in 2014.
