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Are You Prepared For The Next Stock Market Crash?


Are you prepared for the next stock market crashIsn’t it a great time to be an investor in the stock market? The stock market has been on a tear for over five years and every investor has made a lot of money during that period. It’s great to see our net worth increase on paper, but this can’t last forever. Historically, the stock market has a correction every 2 years or so and we are overdue for one. (A correction is defined as a 10% to 20% drop.) Personally, I think a big drop in the stock market is a great thing for long term investors because that’s when you can pick up shares at a discount. I’m excited at the prospect of a big correction! Let’s see what we can do to prepare ourselves to take advantage of the next stock market crash.

Mentally Prepare

The first thing for any investor to do is to mentally prepare for a crash. Everyone loves it when they are rich on paper, but it’s tough to stomach a big drop. That’s why investors get scared and sell their investments at the worst time. If you are investing for the long term, then you have to believe that the stock market will recover eventually. A crash is a great opportunity for long term investors and you should be very happy to see a big drop.

If you have been investing through the last few crashes, you’d know that investing through a bear market is the easiest way to increase your wealth. Of course, you can make more money if you can sell at the high points and buy at the low. However, it’s very difficult to time the market. The average investor should just keep adding to their investment through the bear markets.

Don’t invest money that you need in the next 10 years

I wouldn’t invest money that I’d need in the next 10 years in the stock market. If you’re planning to buy a house, pay for college, or fund your retirement, then you should put those funds in a less volatile investment. The last thing you’d want is to sell when the stock market has crashed.

Assess your risk tolerance and asset allocation

If you haven’t been through a few crashes, then you really need to figure out your risk tolerance and asset allocation. Your personal risk tolerance could be lower than you think. In that case, you will need to allocate your assets accordingly. Probably more bonds and fewer stocks so when the market crashes, your net worth won’t drop as much. Here is a post I wrote a while back that might help you figure out your risk tolerance and asset allocation.

Ready your war chest

We were 100% invested in the stock market in the last crash and lost $200,000 in valuation. We kept investing through the bear years and we are much wealthier now. However, I wished we could buy even more during those low points in 2008 and 2009. We had good salaries and invested as much as we could, but it still wasn’t a significant amount compare to our total portfolio.

For the next crash, I’ll have more money to deploy because now I have some bond funds and other alternative investments. Our total portfolio has 20% bond and I could trade in some of these for stock if we have a severe crash. I know that’s trying to time the market, but I’m going to try it and see how it works out.

Keep Investing

Lastly, we need to keep investing. I know we’ll see a stock market correction or crash at some point in the future, but I have no idea when. It might happen next week, 3 months from now, or even next year. You don’t want to build up a big cash position because stock might go up 15% before a 10% correction happens. Stock analysts have been predicting a crash for a few years and if you sit on the sidelines, you would have missed out on tremendous gains.

Are you prepared for a stock market crash?

The bull markets make you feel good, but bear markets will make you rich. Basically, you need to keep investing through a stock market crash. It will be scary if you haven’t been through a few of these, but that’s the most surefire way to go.

Are you excited for the next crash? I think it would be a great opportunity to increase our dividend payout for the long term. What are you doing to prepare for the next stock market crash?

Photo credit: flickr by nordique

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 32 comments… add one }
  • Sofokles July 26, 2015, 2:18 am


    I would first like to thank you for an extremely inspiring blog. I read it daily and the links course from my own blog.
    I live in Sweden and is 29 years old. I have never been “interested” in the economy until the summer of 2013. All of a sudden, I got aware of what savings (in funds / stocks) can do. Quite honestly, I have until the summer of 2013 just had a savings account. Then I have a thrifty living and that I am not the guy who “spend wildly” I have managed to build up a good capital (everything is relative). I am completely debt-free, living in a condominium, and has about 1.3 million in capital = $ 151 287. I have a job that becomes ”long-termed” now in August. I work as a teacher and has studied for 5 years for this. Right now I am reading for a Masters course as I partly want to broaden my knowledge, and become scientist / doctor in the future.

    My goal with my savings is that at age 40 (ie, 10.5 years) have the choice to live 50 % of my income / dividends and work 50%. Your blog is very inspiring for this and that is after a year of mixed strategies, I now come to the realization that a dividend machine / money machine is the strategy I consider best for me. I do not have time to swing / day-trading. I check my account 1-3 times / day just to see if any news of my holdings come. As for prices, they go up – and down. Up and down. Such is the market. However, my focus is all the time + 10 years and more. Then play rate fluctuations, no significant matter as long as the dividends will as well, which is desirable, is raised. The money I invest ‘I do not need “of 10 years or more.
    Right now my annual dividend is about 30 000 = $ 3,491.

    Of my total capital is about 70% of my portfolio and 30% are in my war chest. However, I am considering to shrink it to about 20%. Here, I wonder what you think about this? I know that it is I who make the decisions and that your opinion does not have a significant role. However, it is always good with feedback from knowledgeable and comp exam investors.

    My second question: I have begun to look at American companies. The downside for me who lives in Sweden is partly that we have negative interest rate right now (-0.35%) and the dollar is very high. FED has been flagged for a raise and what happens in Sweden are few who know. Sure, the interest rate to be raised, but when? Probably about 1 year’ is what most people thinking.

    My question is: I’m very interested in J & J (Johnson & Johnosn), SBUX (Starbucks) and KIM (Kinder Morgan). Both have nice dividend history. I am most negative to SBUX, which has grown very well recently and the question is whether the “train has gone.” Certainly remains Asia, and more, but still I am doubtful. Do you think that J&J and Kim is worth buying at the current level and that I should have them in my machine that will work +10 years? Or should I be cold and wait for the Fed’s hike/action (which may not come for a while)?

    I know and understand that you get a lot of emails, comments, etc., and that your time is limited who is also valuable. However, I wonder if you could give me some tips / advice to think ang. my questions? I know Björnemark spirit will come … eventually and I’m mentally prepared for this. It will be tough but it is just to keep on holdings and buy – not sell! I have written down the different ways of thinking, made calculations, etc. for this to be “calm” me when it happens.

    Similarly, if you have other advice, ideas, tips ect. to give, I would be eternally grateful.


    Ps. I used googletranslate for this. My english is ”ok” but although i preferd to use this service. I hope that my text is ”readable” and ”understandable”.

    • retirebyforty July 26, 2015, 11:39 pm

      I like JNJ and KMI. I have KMI and has been looking at JNJ.
      I would invest now and keep adding as you have extra money. You can’t control what the FED will do, but you can control what you buy. Just keep buying quality companies even if the market crashes. See Jason’s blog for more analytical articles. He’s much better than I am at diving into each stocks. I don’t have enough time to track all the stocks.
      Good luck!

      • Sofokles July 28, 2015, 2:31 am

        Thank you for your answer!


  • Julie April 11, 2015, 5:28 am

    March 2015 I rec’d life insurance after my husband passed away. My investment account is $1,810,000. So far I have 21% in stocks (mostly funds) and 15% in non-taxable bonds. I have approx $1 million in cash. I plan to have a 60% bond / 40% stock mix. I also have a land investment worth $350k and home $450k. No debt or mortgage. I am 47 and retired with 3 kids (college plans funded). I have my husband’s pension of $1,300/month for life and SS until kids age out of $4,300/month (youngest is 10).

    I’m not loving the investment options right now but know I need to do something. I’m just moving slowly knowing I may miss an uptick. I just can’t stomach investing it all and have a correction the next day.

    Until there is a correction, I plan to start looking at individual dividend stocks with a yield over 3%. With these I can better handle a correction since the investment would be for the dividend. This week I bought $20k in Dow Chemicals. I plan to be fully invested by the end of the year.

    Any suggestions for dividend stocks that are better valued compared to the market?


    • Josh April 11, 2015, 1:53 pm

      I’m sorry about your loss. Only you can decide, but my recommendation would be to just keep the money in cash and not do anything for at least 6 months to a year. You need to allow yourself and your family to grieve instead of focusing on getting a return on your money. Good luck.

    • retirebyforty April 11, 2015, 5:07 pm

      Hi Julie, I hope you are doing well.
      I think it’s the right choice for you to invest a little at a time.
      Check out Jason’s site – dividendmantra.com
      He write easy to understand articles about dividend stocks. He’s been helpful for me.
      Right now, there are not a lot of good value. Most investors like Jason and me are buying more dividend stocks as we have extra money.

  • Justin @ Root of Good April 10, 2015, 9:33 am

    I’m ready, but I’ll admit to having more fun watching the portfolio add money instead of lose money every day (like happened back in 2007 and into 2009).

    I sort of mentally discount what we have and figure 20% can go “poof!” at any moment before we even realize we’re in a crash.

  • Josh April 10, 2015, 8:19 am

    Stock market crash typically means economy is also crashing or is about to crash which will lead to massive layoffs, foreclosures, and financial difficulties for many people. Hoping for a major stock market crash so that one can buy stocks cheaply when you know you probably won’t be impacted much, but know others will is somewhat twisted. Its’ true that someone can hire employees on the cheap and scoop up foreclosed houses at a fire sale after an economic crash, but defense contractors can make lots of profit during a huge war also and drug companies can make more money if more people become ill too. Someone can get rich with that sort of mindset, but it’s much better to provide something useful for society and make money at the same time.

    • Mike Drak April 10, 2015, 8:48 am

      Josh, I don’t feel guilty about benefiting from a stock market crash. I can’t control the economy but I always feel for the people that are adversely affected when things turn bad. That’s why we try so hard to become debt free so that we can become immune from a bad economy. To be honest I cringe when I read about mergers that result in cost cutting via job-losses and hopefully I can avoid owning those stocks. There are many other things that bother me in this world as well but that’s another story. Guess as I get older i see the world differently.

    • retirebyforty April 10, 2015, 9:04 am

      A stock market crash is inevitable. It’s going to happen if I hope for it or not. I don’t think it’s comparable to making profit in wars.

      • josh April 10, 2015, 10:16 am

        You’re right, profiting from war isn’t the best analogy. Natural disasters are also inevitable, but if someone in the construction industry states privately that they’re excited for the next huge event so their business picks up greatly, that’d be an off putting comment too. Most people would be much better off providing a product or a service that benefits society instead of brainstorming how to take advantage of temporary lowered asset prices. There’s a reason why most of public dislikes wall street even though they play an essential role in an economy.

  • BE Pennypacker April 10, 2015, 7:53 am

    You’re right. A stock market crash is like Christmas for long-term investors. I don’t really do anything different to prepare for the crash, but I do have a plan in place when the crash hits – take the extra cash I currently throw at the mortgage and use it to buy up the blue light specials. As the stock market recovers, I slowly go back to paying extra on the house.

    • retirebyforty April 10, 2015, 9:03 am

      That’s a good plan. I like that.

  • Money Beagle April 10, 2015, 7:19 am

    I don’t think that a correction or crash is imminent, but it has been said (and does seem to be true) that there aren’t many values out there. Stocks have had a great run and it does seem that there’s a good chance they’ll go sideways or potentially down (though I think a modest correction would be more likely than an all out crash) over the next several years.

    • retirebyforty April 10, 2015, 9:02 am

      I’m hoping for a modest correction as well. The overall PE of the stock market seems very high, though. We might get a big crash since the world economy still isn’t doing very well.

  • Mike Drak April 10, 2015, 6:30 am

    Joe, I feel the same way as you do. I continue to build a high quality dividend portfolio and can’t wait till stocks go back on sale. The key is to select stocks that have the financial strength to maintain their dividend even in the worst of times. Investing this way with a long term approach allows me to avoid the noise/worry generated from the daily stock market action and every time one of my stocks increases their dividend i just sit back and smile. Recently energy stocks have been under a lot of pressure the sale signs went up and it gave an opportunity to buy some quality yield if you had the stomach for it.

    • retirebyforty April 10, 2015, 9:01 am

      I picked up a few shares of Shell when it dropped. Oil stocks are still volatile, but I think they are a great investment over the long haul. The supply will eventually get lower again and the price will inevitably shoot up, right?

      • Mike Drak April 10, 2015, 11:47 am

        As long as they keep paying the dividend I don’t mind waiting at all and yes while the timing is unsure I’m confident that prices will eventually recover.

  • Jon April 10, 2015, 5:33 am

    I am just going to ride it out like I did the last time and the time before that. The market eventually comes backs and rewards those that stick around for the long term. I too have some cash saved up for future investments to take advantage of a drop. I didn’t have much to invest during the last drop, but still took advantage of it a little bit.

    • nicoleandmaggie April 10, 2015, 8:44 am

      Ditto. That “no crystal ball” thing really hinders market timing.

    • retirebyforty April 10, 2015, 9:00 am

      Riding it out is the best way to go. Unless the economy collapse for 20 years, then we’re bound to do well.

    • ikomrad April 12, 2015, 9:08 am

      That is a good strategy. You’ll automatically by more shares when prices drop as long as you continue putting the same about of money in each month.

      The most I might do during a crash is shrink my 1 year emergency fund down to 6 months to buy more stock as long as my job is secure.

  • Mike April 10, 2015, 5:20 am

    I personally haven’t gotten into stocks yet. I am choosing to spend my time in things that are a little bit more under my control at the moment and choosing to spend my money on things that will help me to stomach the stocks in the future (i.e. savings accounts).

    • retirebyforty April 10, 2015, 8:59 am

      You really should get into stock as soon as you can. That way you can learn from experience. Even a little investment can teach you a lot in the long term. You need to go through a few crashes to be able to stomach those drops.

  • Steve April 10, 2015, 5:09 am

    Filing this under ‘general internet nonsense’. First off, the last bear market low came in March 2009, 2007 was a blockbuster year which suckered the last few in. Remember infamous ‘ninja loans’? Being frugal was actually tougher when the profligate seemed to be getting ahead… And maybe Early Retirement funds should be in more conservative investments, but young investors still need to chase the best reward for their ability to take on risk. That has historically been in the stock market, and it actually seems to be individual stocks going forward…

    • retirebyforty April 10, 2015, 8:58 am

      You’re right. I fixed the date to 2008-2009. I like stock investment, but having a small portion of your money in bond funds in a good thing in this environment. If you’re young, you can weather the downturn better, though. A lot more time to recover and you don’t have that much money invested anyway, usually.

  • beth April 10, 2015, 4:51 am

    I put $800 per month in to my brokerage account and I am going to try and leave it as cash in the account until a correction happens. Seeing a growing cash balance and not making a purchase is very hard for me but I know I can get some real bargains if I wait for the correction.

    I am also putting $200 per month in to an account to purchase GICs. If interest rates rise I will put less in stocks and more in to the GICs because I am in my early 50s and I need some very secure investments.

    • retirebyforty April 10, 2015, 8:56 am

      I don’t really like leaving it as cash because you never know when the market correction is coming. It’s probably better to mostly keep investing and keep a little cash on the side. I’m not really sure what GICs are. Having a portion of your money in more stable investments is a good thing when you get near retirement.

      • Retired To Win April 10, 2015, 3:48 pm

        I’m usually pretty comfortable with 10% of my portfolio in cash. I leave it that way specifically to be able to grab opportunities when there are hard reasonless dips in the price of stocks I have my eye on.

        Frequently, I do go over 10% cash. But that’s because I will have sold something at a profit. I consider the funds from those profitable sales to be “temporary” cash because I look for something else to buy with them pretty quickly.

      • beth April 10, 2015, 4:32 pm

        GICs are guaranteed investment certificates here in Canada. I think they may be like your CDs. A safe guaranteed investment with very low interest rates right now.

        I am trying to get a pile of cash together because I think the crash will be here sooner rather than later.

      • ikomrad April 12, 2015, 9:05 am

        In general, it’s best to invest money sooner than later as long term growth will outweigh any short term gains you get by timing the market. Another reason not to wait is that if the event that you are waiting for never happens, then the money you had on the sidelines was doing nothing for you when it could have been growing.

        Invest slowly and steadily, be the tortoise not the hare.

    • RetireBy55-I-hope April 12, 2015, 7:20 pm

      No one knows the future. Market may go up a lot or crash a lot tomorrow, next month, next year. No one knows !! If I were you, I would not hold too much cash. Use most cash to buy a few diversified and balanced mutual funds every month. If the market raises, you make some money. If the market crashes, you won’t lose much. However, if the market crashes enough for you, switch all your funds to most aggressive mutual funds, ETF, or some good stocks over a few stages. Then don’t look at your account again until you see good market news. I am pretty sure you will make some money by that time and you will thank me 🙂

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