Preparing For a Market Crash

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After a pretty insane 2020 and 2021, it almost seems inevitable that the market is going to crash in the coming months and this could hurt a lot of people who have only begun investing recently (me included!), so what can you do to prepare for a market crash?

Now obviously this isn’t financial advice as I’m not a finance professional but I am going to list out some of the steps I am taking to try and minimise the impact of a market crash if it does happen.

1. Continue to Regularly Invest

So it may seem a bit mad for my first step to be to continue to invest but there are two reasons why I will continue my regular monthly investments:

  1. No-one knows when the market is going to crash and by how much
  2. By missing out on some of best days in the market, it could seriously effect the value of my pot over the long term

To elaborate on point two, according to research done by Schroders if you had invested £1,000 in the FTSE 250 in 1986, you would have a pot of £43,595 by January 2021 but if you had just missed the 10 best days in the market, your pot would now be worth £24,156 and it gets even worse if you missed to best 20 or 30 days.

It is a similar story with the S&P 500 as research by JPMorgan’s Asset Management arm shows because $10,000 dollars invested in January 2000, would have been worth $32.421 by the 31st December 2019 but just missing the 10 best days would have dropped this to $16,180.

For me, this just shows that it is better to be in and ride things out rather than trying to be a market expert and time the market. So I am continuing my regular monthly investment into my Vanguard ISA and because I am a lazy investor, I have opted for one of the lifestrategy funds.

This is because it covers a lot of different markets, you can choose which balance of equities and bonds that you want and the fees are pretty low (ongoing 0.22%). This saves me from having to choose individual ETF’s or Funds and then having to manage and balance the portfolio as well.

2. Staying Calm

As much as we like to think that the stock market is based on highly advanced algorithms and in-depth analysis by very clever people, much of it is actually based off emotion.

This is because crashes are caused by people getting scared, panicking and then trying to offload their positions before they incur more losses.

And while this seems sensible for retail investors like you and me, institutional investors do exactly the same and in many cases it is these institutions that initiate the crash in the first place.

It is for that reason, that I am going to remain calm and think about the long term, which historically has shown that the market is on an upward trajectory. So I will be keeping all my investments in place and just look to ride out the storm.

Another thing to remember is, you only make a loss if you sell! Otherwise it is just figures on a screen.

3. Keep The Emergency Fund Topped Up!

I have seen a few financial ‘influencers’ say that it is stupid to have an emergency fund and instead you should invest everything into the stock market, crypto or whatever but many of these have never been through a financial crash before!

I have and was 21 year old student when the 2008 crash happened and although I wasn’t an investor (I didn’t have much money!), I did see the impact of the crash, including the lack of jobs and it was the people who had good financial foundations that came out the other side relatively unscathed and that is why having liquidity has always been important to me.

So I am making sure that my emergency fund is topped up and should things get hard, having a few months worth of living expenses behind me should make it easier to ride the storm.

The only time where this doesn’t work is if there is hyperinflation, which means the cost of everyday goods go through the roof but this is something that is very difficult to prepare for.

4. Buy Different Asset Classes

I think diversity is one of the keys to not only successful investing but also in navigating a crash as it is never abundantly clear as to which sectors are going to take the biggest hit and it varies from crash to crash, for example:

  • The 2000 Crash primarily hit the tech sector as it was caused by internet companies who were massively overvalued and in many cases not profitable or even fully operational
  • The 2008 Crash primarily hit the property market (real estate) due to sub-prime mortgages being given to everybody and their dog and when people started defaulting, it all came crashing down (I seriously recommend watching the Big Short!)

So as we don’t know what sector is going to suffer, it can be useful to buy different asset classes as an almost hedge against the market.

There are plenty of these to choose from, including:

  • Gold & Silver – precious metals are often seen as safe havens in uncertain times as they rarely lose all of their value
  • Property – another physical asset and one that may grow in value over time, plus you have the potential to generate rental income from it
  • Cryptocurrency – the most volatile of all asset classes but the likes of Bitcoin and Ethereum are becoming a more popular alternative investment

For me personally, I am putting a small amount into Gold as from my experience in the jewellery trade and running a jewellery retailer for over 7 years, I have good understanding of how gold works in relation to the stock market. I have opted to buy Gold ETF’s rather than physical gold due to it being easier to liquidate and also not having to store it!

5. Building Multiple Income Streams

Market crashes have far reaching impacts and especially since the 2008 crash, we have seen how uncertain the job market has become and there most definitely isn’t such a thing as a job for life anymore!

And that is why it is always worth looking into building multiple income streams as this is going to soften the blow of a financial crash.

For most people, their main income stream is going to be their job and in this regard, you want to make yourself as employable as possible as this is going to increase the chances of you either keeping your job or getting another one should you lose your current one. Things like skills, qualifications and experience can help.

But you also want to look at developing additional income streams such as:

  • Dividend Income – you can invest in individual stocks or ETF’s that pay a dividend income and although for growth, you want to reinvest these, having the option to draw them out can be a good additional income stream.
  • Rental Income – I briefly covered this above but you can buy property and rent it out, I personally wouldn’t as being a landlord in the UK can be a headache but many people have made good second incomes from rental property.
  • Start a Business – often referred to as a ‘side hustle’ but starting a small business on the side can be a great additional income stream, you can start online businesses such as ecommerce or blogging or you can start a real world business such as dog walking or cleaning but you want to find something that you can easily fit around your current work situation

As the common analogy goes, most millionaires have 7 income streams and while this is difficult to achieve for most of us mere mortals, it is something that you want to think about creating as it can help remove some stress of just being reliant on one income source.

For me, I am building out this blog, my dedicated ecommerce blog and also my YouTube channel, all of which generate me income and even though they will undoubtedly take a hit in a crash, they should be able to all provide me with enough income to get through it.

6. Minimise Your Expenditure

For some people this is going to be easier than others but it is worth looking at what you are spending every month and see if there are any things that you can cut back on.

This is because when a crash happens, you ideally want to be in the most optimal position possible and have a nice difference between what comes in and goes out every month.

Obviously everyone’s situation is different but a couple of things you could consider could be:

  • Reduce Your Mobile Phone Contract – according to the Money Advice Service, the average UK phone bill is £45.60 a month, which is a lot of money and by switching contract or going to a sim only deal, you could save a lot of money a month.
  • Your Car – apart from people’s homes, one of the biggest expenses is their car and when you factor in loan or finance payments, insurance and tax (ok, Vehicle Excise Duty), it can be a big monthly outgoing. Could you swap your current car for something cheaper to run? Or even just shop around for car insurance as I saved £120 on car insurance just by switching this year!
  • Subscriptions – pretty much everything is subscription based now, from your TV package to streaming apps for music (Spotify) or films (Netflix). But with so many available, you may be paying for ones that you don’t really use, so find out all of your subscriptions and cancel the ones you are not using

As Tesco say, every little helps and the more money you can save every month, the easier it will be to ride out any kind of market crash or recession.

Conclusion

It doesn’t matter how much you prepare for it, when it happens it is going to suck and there might be some pain but the more prepared you are for it, the easier it is going to be to deal with.

Part of me is quite scared about this crash as it could be a big one but I am taking steps to try and shield myself from it as much as possible, so that it doesn’t hurt too much when it happens.

Anyway, I hope you found this post helpful and it has given you somethings to think about when it comes to managing your money, thank you for reading!