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Is the stock market going to crash?

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After the coronavirus crisis, it was Russia’s invasion of Ukraine that reminded us: a stock market crash can always occur.

Every day, one or another article warns of the impending financial crisis even worse than the previous one, again alarming investors.

Warnings against exaggerated optimism on the financial markets are multiplying, with some even announcing a sharp drop in the stock markets.

Of course, we don’t expect the stock market to grow in a linear fashion: increased volatility, with intermediate corrections, is inherent in any stock market investment.

But don’t be impressed by these alarming reports.

Keep investing for the long term, stay diversified and don’t take excessive risks. Also be sure to keep some cash in a savings account.

This file will give you some useful advice to limit your losses, and even to take advantage of the opportunity to increase your wealth.

If you found this article, it’s a safe bet that the market is probably in a period where the stock market is falling, or there are rumors of a drop again, and you are worried about your investments.

So is there reason to worry about the stock market falling or rising day to day?

 

If your investment objective is to invest for the long term, to prepare for your legal retirement, or to stop working well before, and your investment horizon is therefore at least 20 to 25 years, you have no reason to worry about the stock market going down on any given day.

Your long-term goal has required you to define your risk tolerance well in advance, and it can (and should) be quite high, as it allows you to take advantage of the incredible strength of the stock market to beat all other types of financial investments.

A well-chosen equity fund, or an ETF, or a mix of different funds are ideal vehicles to weather any crisis.

The various financial crises at the time devastated the investments of many.

Many have lost a lot of money.

What lessons can we draw from this?

It’s usually because they had misplaced that money, for example in poor quality stocks, or in a bad fund, or even worse in stocks of just one or a few companies.

Many have seen the value of their investments decline by 30% to 50%.

The worst is over each time, but very often, panic returns, as soon as prices fall a little.

‘Stock market crashes are normal, they will always happen, so learn to live with them. They are even an opportunity to accelerate your arrival at financial independence.’

History has always known financial crises

Following these various stock market crashes, some have concluded that you should never again invest in stocks, bonds or investment funds.

They have put all their money in a savings account which earns them a maximum of 1%.

‘Better than losing more!’ , they say.

The specter of losing money in a stock market crash is ever present.

They are wrong.

I am happy to recall what I have already often written: since its foundation on January 1, 1927 until today, therefore for almost 100 years, the stock market index  S&P 500 (which represents the 500 largest companies Americans)  had an average annual return of 10% ,  despite  all the occurrences of economic crisis.

This is because after each crisis, the stock market starts again:

No one can follow this yoyo: one day the Dow Jones falls 273 points, the next day it gained 275!

 

How to analyze this?

 

It’s just not possible.

Don’t even try.

Just keep your focus on the long term.

Markets always react in the short term, so it’s good to remember that the market, even after dizzying falls, ultimately always goes high.

But many people forget.

They are worried about the economy in Europe (and I understand them with these fools who run us), about the troubles in Ukraine, about Korea, Ebola, rising rates, falling rates, Donald Trump, the terrorist threat, China, the bitcoin bubble, Brexit, and now the covid-19 crisis .

There is always something wrong with the news of the world.

The media tends to amplify bad news, and obscure good news.

I can reassure you

 

We’ve seen this movie before.

Yes, stock prices have fallen in the past and will fall again in the future.

There will be another stock market crash one of these days.

There was one in 2020. It was just terrible. But it didn’t last long.

Because that’s what stocks do: go up and down.

But history teaches us 2 things: after every stock market crisis, there is a rise, and each period of rise is stronger and longer than the previous period of decline.

Each period of decline is therefore the ideal opportunity to buy more to complete our portfolio.

That’s the good side of financial crises.

Maybe you are not convinced.

Perhaps you are appalled by the news about Corona, the trade war with China or the consequences of Brexit.

But put that in context.

Before the crisis of the moment, it was (choose) the Mad Cow. And before the latter, the Severe Acute Respiratory Syndrome.

And before that the Avian Flu, which itself succeeded the Swine Flu.

Didn’t some cranks claim that the world wasn’t going to stop in 2012 (it was a prediction of the Mayans it seems)?

And that all the computers were going to stop in 2000 (I know some who spent the night testing their machine)?

There is always something that the media will promote as the next cause of our destruction.

Since we are all going to die tomorrow, I therefore propose that we stop paying our bills today!

A stock market crash takes you by surprise?

It’s quite normal. It’s typical of a stock market crash.

And there are so many fantasists who keep predicting the next stock market crash over and over again, that they do end up being right from time to time.

And so you will constantly read the most fanciful and nightmarish predictions about the next stock market crash that is sure to happen soon.

Where has our common sense gone?

Nobody predicted a stock market crash in 2019 because of the arrival of a corona virus.

Therefore, your long-term goal is the only thing that really matters!

So keep your focus on your goals.

If you follow my investment advice (and especially my training), you will have an effective and efficient strategy to achieve your financial freedom.

Would not change a thing.

It’s as simple as that.

You can ignore the bad news of this world.

You don’t need to read stock quotes every day, or even every month.

You can ignore the next stock market crash.

Personally, I only watch the courses once a year, and again, it’s to write an article about it.

 

A stock market crash is an opportunity to invest

 

When the wind blows, some run for shelter, others build mills.

The ups and downs of financial investments are normality itself.

 

 

And, as my professor of economics in college used to say, when a curve is at its lowest, it can only do one thing: go up

So that’s years of study summed up in a single sentence!

When the markets are high, your investments are doing well, but buying more costs a lot.

Conversely, when the markets are low, buying stocks is very profitable.

Far too many people are just market watchers, not players.

They are afraid to buy stocks when prices are too low; they dare not buy shares when prices are high, for fear that they will fall.

 

You can never win in a market if you don’t participate in it.

 

Myself, I keep telling myself: ‘don’t watch the lessons, don’t watch the lessons’ .

Why?

Because I want to watch, but I shouldn’t.

The market continually corrects itself.

It goes up, it goes down, it stabilizes, it goes down some more (ouch… but ignore it!).

It’s worrying if you think about it too much.

But since all this has nothing to do with the (good) investment choices you made, why bother?

If you follow my advice, you are not a buyer of individual stocks that are continually buying and selling.

On the contrary, you have purchased well-diversified investment funds (ETFs).

 

Ignore stock market news.

 

The big problem is that fear of the stock market’s natural volatility prevents some people from saving and investing for their retirement.

And the biggest mistake you can make is investing too little to achieve financial freedom.

If you have a lot of money in a savings account, don’t just sit around and do nothing.

In reality, you are impoverished because the inflation rate annihilates the return offered by the savings account.

  1. If you are not yet, become the owner of your home. Renters never get rich.
  2. Invest in your home if necessary. A new high-efficiency boiler, roof insulation, switching to cheaper energy can lower energy costs so much that your return will far exceed that of a savings account.
  3. Invest each month in the purchase of  investment funds (ETF) With a well-balanced long-term strategy, you will achieve excellent results without excessive risk.

Learn from financial crises

 

You have to:

  1. Continue to invest each month in well-chosen investment funds, preferably ETFs. You must do this automatically, at the beginning of each month, before making any other expense. This will help you get the most out of your investments, both in rising and falling markets.
  2. Reassess each year (not every day, not every month!) the investment funds you have chosen.
  3. Adapt the choice of your investment funds to your financial situation and your age.

The closer you are to the moment of your financial freedom (for example your legal retirement, but hopefully well before if you follow my advice), the more you must be careful, and perhaps adapt your investment strategy.

You don’t really have a choice

Tell yourself that the state will not have enough money to pay you a comfortable retirement.

You will have to do the necessary yourself. 

The fear of a stock market crash certainly cannot become an excuse for your inertia.

Sudden in nature, a stock market crash is always imminent

 

How would you react to such an event?

Are you the type to panic or are you on the contrary keeping your calm?

This article will give you some useful techniques and tips to limit losses, or even take advantage of the opportunity to strengthen your investment portfolio.

From speculation on tulip bulbs in 1637 to ‘Black Monday’ on Asian stock markets in August 2015, sudden falls in listed securities (stocks, commodities, bonds, etc.) have been around for nearly 400 years.

All of these falls are unique in that they are more the exception than the rule.

They can be brutal, with losses of several tens of percent, disappear as quickly as they appeared, or on the contrary last a long time.

They also often occur after a long period of improvement, just when everyone has invested heavily in listed securities.

And they have ever-increasing ramifications. It is therefore rare these days for the consequences of a stock market crash to be limited to the single market concerned.

This dossier takes a closer look at this subject.

Is a stock market crash predictable? Should you try to avoid it at all costs? How can you guard against it?

 

Let’s start with the bad news

 

Systematically predicting the exact timing of a stock market crash or a salami stock market crash (when the stock market drops ‘in chunks’) is impossible .

Just as it is impossible to know when the stock markets will then start to rise again.

Stocks posting incredibly high valuations?

Who says they will not progress yet?

Conversely, low valuations do not necessarily mean that equities will immediately rebound.

Of course, the chances of a rise will then be greater, but it is impossible to know when precisely.

I’ve told you this before and I’ll tell you again: If you live an ordinary life expectancy, you’ll see your stock portfolio shrink by 50% or more at least once, maybe even three times. or more.

It cannot be avoided and anyone who claims otherwise, whether a banker, financial adviser or mutual fund salesperson, is either lying or incompetent.

There is no ambiguity in this with regard to academic data: the stock market, as we have already seen, goes up and down.

But it always goes up more than it goes down. Long-term.

That is to say over more than 20 years.

If this bothers you and therefore you don’t want to invest in stocks to get rich and gain financial freedom, accept that you don’t deserve the returns they can generate and therefore don’t buy stocks, as I suggest it below.

If you invest in the stock market for more than 20 years, do not be interested in declines (even significant) in the short term.

There are people who like to follow the stock market, and who try to get rich by buying and selling individual stocks.

I understand that perfectly.

But I’m afraid that’s not the right way to work in the long run.

Active investors are interested in daily stock prices, and try to predict whether the stock market is falling or rising.

Those who are most successful are those who buy rather than sell when the stock market falls.

They are helped in this by company balance sheet analyses, outlook analyses, and very diverse and often sophisticated (and therefore very risky) financial arrangements.

And indeed, if a publicly traded company has serious and solid prospects, buying shares of it when they are cheap is a gigantic opportunity.

Personally, I’ve never done it.

I think doing it well is almost a job in itself, forces you to work (a lot) on your wallet every day and prevents you from sleeping well.

There is no doubt that we will migrate from a pension system where every worker ends up with roughly the same retirement benefits as their peers in the same situation, to a system where whoever understands somewhat the rationality of things and is emotionally disciplined can amass exponentially more money and get rich.

 

Those who are not well trained in the investment process can therefore do a lot of mischief.

 

One of those mistakes is panicking when the stock market declines.

I will be frank with you: it will happen anyway.

The stock market is simply an auction mechanism through which people buy and sell deeds in businesses.

People aren’t always rational, or don’t always have a choice.

Sometimes economic conditions force you to sell when you don’t want to sell: look at what happened in 2008-2009 when some companies collapsed and stock owners were trying to avoid bankruptcy!

They had to sell their house!

Many of these people were well aware that they were selling off their deeds, but they had no other choice if they wanted to avoid having their furniture sold at public auction.

Legendary investor Warren Buffett and his business partner, Charlie Munger, often recount how they watched the value of their Berkshire Hathaway fund drop, for no reason, by 50% or more at least three times in their lifetime.

Half of the net worth wiped out in a short period of time, despite the fact that the underlying businesses they owned were making more money than ever!

There was a weekend in the 1980s when the owners of one of the best long-term investments in history, PepsiCo (they sell Pepsi, among other things), saw 35% of their investment disappear in a matter of time.

Likewise, there was a four-year period between 2005 and 2009 when shareholders of The Hershey Company (the market leader in the sale of chocolate in the United States) saw their investment drop by more than 50%. , although chocolate sales have always increased, and so have dividends.

If you can’t think about it rationally, and realize that just because the market has gone down 25% doesn’t mean you’ve lost 25% of your power (because as long as you don’t sell, your losses remain virtual), you will not appreciate.

And you’re going to do something stupid.

My suggestion?

 

If you feel really uncomfortable when I mention the previous cases, throw in the towel and choose another asset class that better suits your psychological deficiencies.

There’s no shame in being honest with yourself.

I tell you this because I want you to succeed.

You too can get rich, but I don’t want to cause you to lose sleep or cause your blood pressure to continually rise.

If you’re the kind of person who isn’t constitutionally equipped to own stocks, then just don’t own stocks.

Accept that you don’t deserve the higher returns they generate over longer periods of time and be happy with that.

Stocks only work in the long term.

Long-term!

I repeat: long term!

It should be perfectly obvious, but it never seems to cross the minds of some people.

What is your alternative?

Swallowing Rennie lozenges all day long, taking high doses of Xanax and losing your hair from constant worry?

Why live this way?

Life is too short to immerse yourself in this misery.

 

Classic techniques to avoid a stock market crash

 

1. Avoid stocks

 

Inevitably, I can only repeat it: the only way to be sure of escaping stock market declines is to…not invest in shares.

Of course, you will also miss out on the potential offered by these investments and this is always more important than the rest. In the long term at least, because the history of the stock market is also marked by a number of more or less long periods when bonds have done better than equities, depending on the timing of the investment.

In the long term, and I’m talking in this case 20 years and more, stocks will be perfect for saving for your old age.

Therefore, the earlier you start, the better.

MY OPINION: In general, if you’re investing for the long term, not investing in stocks represents too high an opportunity cost in the long term

I therefore only reserve this advice to avoid equities for those who really do not want to take stock market risks and/or will need their money in the short term.

 

2. Do Nothing

 

The stock markets are falling and… you calmly keep your investments.

In this case, time is your best ally.

Over time, as we have seen, a diversified equity investment always tends to grow.

And sooner or later, stock markets end up hitting new highs.

Of course, there are periods of almost zero growth and even declines.

But remember the stock market crash during the Internet bubble (2000) or the banking crisis (2008): all of that is far behind us today. And the corona crisis of March 2020 too.

If, under the effect of the panic, you sold in 2000-2002, in 2008 or in March 2020, you would have missed a huge total gain due to the rate of return of more than 8% that average the actions.

Again: as long as you don’t sell, your losses are only virtual losses.

MY OPINION: ‘Doing nothing’ is only possible if you still believe in the potential of the (funds of) shares you hold and, above all, if you can do without your money for long enough.

History of not having to sell at the worst time.

Personally, even in the worst crises, I never panicked, and I simply waited for the storm to pass.

It’s what I’ve done all my life, and it’s, along with real estate, what made me rich.

 

3. Diversify to mitigate the stock market crash

 

No stock portfolio is immune to a stock market crash.

But by buying different types of stocks, you will avoid putting all your eggs in one basket and thus spread the risk.

Provided that the diversification is correct, of course.

Consider buying stocks from different sectors or regions, in euros and in foreign currencies, opt for growth stocks and value stocks, etc.

MY OPINION: Whether between equities or – better – between different asset classes (equities + bonds + real estate), good diversification will always allow your portfolio to be better armed in the event of a stock market crash.

Be aware that you will already automatically benefit from good diversification with an investment fund such as an ETF.

Some funds include more than 1,000 stocks in different countries and sectors!

This is why I have never in my life bought individual stocks, and I obviously advise you to do the same.

 

4. Buy/Sell

 

A stock market crash in the stock market is very disturbing.

For yourself and for the companies affected.

But a stock market crash can also be the perfect opportunity to reflect on your investments for a moment and make some changes.

Do you still believe in the potential of your investment?

Why not take advantage of falling prices to… buy?

After all, you may never have the opportunity to buy stocks at such a good price again…

Buy and for the rest, time will work for you.

But to buy, you will naturally need money. And if you are then fully invested, you will be stuck when prices start to fall.

Hence the usefulness of regularly (and partially) taking your profits. Especially when a stock or fund has become expensive and takes up too much space in your portfolio.

By gradually building up liquidity, you will not only protect yourself against price declines, but will also have the possibility of buying at a lower price later on.

MY OPINION: Trading during a stock market crash is not for everyone.

Going against the negative mood and, above all, keeping a cool head is certainly not easy.

It will therefore be important to know what you are doing and to have prepared your homework well.

What price are you willing to pay for a share or how much money do you still want to withdraw from a share?

Always use price limit orders in this case to avoid unpleasant surprises and follow the market carefully.

 

5. Stoploss order

 

With stoploss orders , we come to effective hedging against price losses.

As its name suggests, a stoploss order is in effect a ‘stop loss’ order .

With a stoploss order, you place a sell order with a lower selling price at the time.

You read that right: you will be ready to sell at a price lower than the current price.

You are then undoubtedly wondering why place such an order.

Well, know that if you think the upside potential of the stock is not fully exhausted and you don’t want to sell, such an order will also allow you to provide some security.

When the price goes down, you won’t have to pay for it.

Here is an example to better understand.

Imagine that stock X is trading at EUR 50 and you place a stoploss order at EUR 40. If stock X goes up, nothing will happen and you will profit from the rise in price.

If, on the other hand, the stock declines and at some point falls to EUR 40, a sell order will automatically be initiated at EUR 40 and your position will be closed. If the stock falls further, you will have limited your loss.

The term ‘stoploss‘ can also have another meaning.

Imagine that you bought this position several years ago at 30 EUR. In this case, a stoploss order will not be used to limit your losses to 40 EUR, but to ‘click’ a certain gain. Such an order can therefore also be used to secure part of the gains, without affecting the upside potential.

MY OPINION: Although a stoploss order can help you secure your portfolio, this technique is not always a panacea.

To begin with, setting the stoploss price level is not easy.

Then, such an order is indeed very effective when the price gradually decreases.

But when a stock suddenly loses a good part of its value, you are no longer guaranteed to sell at the price you wanted.

Before placing such an order, you should therefore be well aware of the possible scenarios.

You should also know that a stoploss order always has an expiration date (usually the end of the year).

Remember to renew it in time.

Finally, if prices rise suddenly (and predicting when the upward movement will start again is impossible), you will not benefit from it if you have not bought back in time.

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