The US stock market underwent it's first 10% correction in 2018, and now stocks are on the edge of all-time highs, and driven higher by corporate earnings.
But, with global trade tensions growing day by day, rising short-term interest rates, and indications of moving into the late phase of the business cycle, a stock market decline may be on the horizon.
Indeed, Paul Tudor Jones, a hedge fund investor famous for predicting the 1987 stock market crash, is expecting a market crash as soon as 2019. He told Goldman Sachs, that "We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs such as bubbles in stocks and credit." Jones isn't the only one predicting an imminent crash. Scott Minerd, Global chief investment officer and chairman of investments for Guggenheim Partners, told Times that, "The markets are potentially on a collision course for disaster." The majority of financial experts seem to agree: the economy has been too strong for too long, and now, something's got to give.
So, how can you prepare for the inevitable down turn? Here are six tips to help you protect your income in the case of a stock market decline.
Invest for the Long Term
While what goes up must come down, the opposite is also true when you're talking about the stock market. Though the stock market rises over longer periods of time, it's often interrupted by short-term downturns. The short term is ruled by investor confidence, meaning changes can happen quickly. But the long term tends to be more about real wealth creation as companies generate free cash flow and pay down debt. So, your short-term plays should only make up a small portion of your overall investment portfolio, as these can be more subject to damage in a volatile market.
Invest in Individual Companies Instead of Indexes
If the market begins to fall, it's best to have your money in individual companies that you believe in, instead of allocating money to an investment fund that tracks an index. Francis M. Kinniry, head of portfolio construction at Vanguard, told the New York Times that, "It's not an active versus index story, it's high cost versus low cost. They underperform because they're charging too much for the 'alpha' they generate," he added, referring to the return in excess of the market return.
Have as little debt as possible
Debt only gets harder to pay off during a decline in the market. Make sure that you aren't spread too thin on margin (borrowed funds to invest with) when a market crash starts to look likely.
After the last market crash, Europe and Japan were slower to recover than the United States and therefore still have years to go before they crash. Darrell L. Cronk, president of the Wells Fargo Investment Institute, said that the recoveries in Europe and Japan started closer to 2014, as opposed to 2009 in the United States. So, your money may actually be safer invested overseas.
Diversify your Investments
As the saying goes, don't keep all your eggs in one basket. Make sure you don't have all of your money tied up in one place, because then a sudden drop could mean financial disaster. Instead, diversify your stock portfolio, and diversify across different asset classes and regions as well. How you invest depends on your risk tolerance, time horizon, and long and short term goals. Careful diversification can be one of the best tools to come out of a stock market crash financially intact.
Cash is King
Wall Street Journal
Tying up all your money in the stock market is never a good idea. Make sure you have some cash saved to get you through in case your investments take a hit, or some cash in the money market. Your goal should always be to conduct your affairs so that if you were to get laid off or meet some other unexpected cash expense, you would not be on the brink of disaster.