Are we due for a market correction? How can you prepare for the market crashing?
Low interest rates on savings accounts have led investors to move money into the stock market. The first wave of Baby Boomers to hit 70 ½ occurs in 2016, and they’ll be required to withdraw distributions from traditional individual retirement accounts. Oh yes… and the seven-year cycle. The dotcom crash and the 08’ crash occurred within about seven years of one another.
Is the market going to crash?
No one knows for sure, but here are three tips on how to prepare for a possible crash.
1. Remember Your Time Horizon
Recently a 92-year old janitor, Ronald Read, passed away and donated $6 million of his $8 million fortune to a public library and hospital. His community had no idea he was a multi-millionaire.
Maybe it was his extreme frugality (he used safety pins to button his warn out jacket) that fooled everyone!
Although Read had a low income, he had a long time horizon, or period of time to invest. After graduating high school, he served in the military, then worked at a gas station until 1979, and then part-time as a janitor. That is over 55 years of working, saving, and investing.
CNBC reported that Read, “had the control to hold onto stocks for the long haul,” which is the strategy Warren Buffett recommends too.
Amen to that.
2. Expect Downturns
The stock market is a lot like life. When times are good, they are really good, and when times are bad they get really bad. Historically the stock market rises and falls in value also. Economic downturns are inevitable, just like illness, job loss, or accidents.
Things happen, that’s life and that’s investing.
When (not if) a downturn comes and your portfolio declines, emotions naturally kick in. Often people completely forget their long term investing plan and take a loss by selling their stocks. In 08’ the S&P 500 fell 37%, the investors that panicked and cashed-out took the loss. The investors that had a Buffett, buy and hold strategy, ended up winning when the next year the S&P 500 rose 27% and continued to rise for years to follow.
3. Have an Emergency Fund
Lastly prepare for a downturn or economic hardship by having an emergency fund of 3-12 months of expenses saved for a rainy day. When your retirement account declines (whether it’s this year or fifteen years from now) those funds are not funds you will be living off anyways until you are 100% retired. Any uncertainty you have about the economy is then a good reason to get serious about having an emergency fund that is liquid (cash or money market) savings for a rainy day.
Need a little more motivation? Watch this video about the multi-millionaire janitor. That will pump you up and prove that anything is possible.
Have a great weekend,