Our friends Dow and Jones sure are sensitive fellows, aren’t they? They hear one thing in the news and then you can’t control what crazy stuff they’ll do.
When you begin to feel the rumblings of a market crash earthquake, what’s the first thing you do?
That’s why we have to prepare!
I’m not talking financial doomsday. But at the beginning of the year that must not be named, we had no idea that the market would fall nearly 35% in value in just over a month. So what’s the number one thing we should do in preparation for a market crash?
If a Market Crash is Coming
Get an emergency fund.
“Emergency Fund” is not a sexy term or anything but it becomes sexier as the stock market falls.
When we talk emergency fund, we’re talking 3-6 months of expenses. Or even just a starter emergency fund of $1000 if you’re working through paying off your debt. The fact is, an emergency fund will lower your stress levels as the financial sector starts to go south for the winter. Or for the summer or whenever market dips.
Protecting Your Money as a Retiree
Now here’s what many people miss when covering an emergency fund: you retired folks. Many of our retired friends have enough money invested in the stock market in order to live off the interest every year.
For example, with a cool $1M invested, if the market gains 8%, that’s $80k of returns to live on without even pulling any of the $1M out of the market. But with the downturn in an economy, every dollar taken out of the market then becomes, relatively speaking, more expensive to use.
Let’s go back to the $1M example.
If the market saw the same 35% drop that it did in the year that must not be named, that means the same $1M turns into a measly $650k (more than 10x my 401k!).That means that every dollar taken out during the downturn will cost the same retired couple the equivalent of a buck fifty when the market comes back. $80k right now is $120k when the market heals. So how do we avoid this?
With a big freaking emergency fund.
Since downturns in the economy last an average of 15 months according to Acorn Investing, I think at least a 15 month emergency fund makes a lot of sense. In training for financial coaching, we are actually taught 18 – 24 months when coaching retired folks.
And yes, you’re losing out on growth in the economy when you have that much money in cash. But if you put it into a high yield savings account, you can at least keep from losing as much to inflation’s chopping block. And at retirement age, generally you are far more risk averse because there’s far more to lose.
With a large emergency fund, you don’t have to worry about pulling money out of retirement accounts when each dollar is less valuable. Just use that emergency fund until the market comes back and proceed as usual.
Don’t Do This Before a Crash
When you begin to feel the rumblings of a market crash, this is what you should not do: Don’t pull your money out of the market. Just let it ride, okay? The market will come back. Continue to invest the way you’ve been investing.
Just say in the coolest way possible, “Mr. Fidelity, I’d like to make another deposit.” And any money that you invest as the market is dropping will be more valuable when it comes back and hits the next all time high.
To clarify, I’m talking about people with stability in their finances. If you can afford to continue investing through a downturn, obviously do it. If you have to conserve due to a job loss or something, do what’s best for your family. Make sure you have the necessities taken care of before you continue throwing money into the market.
Conclusion
I know that a downturn in the economy can be scary. But preparing with an emergency fund and continuing to invest will help level you out emotionally.
Another 2020 will come..uh…another year-that-must-not-be-named will come. Maybe not in the same way. HOPEFULLY not in the same way. But it will come. Markets will fall. And they will come back. Just stay focused.
So I’ll pass this question onto you: Are you ready for the next market crash?
I’d love to hear from you in the comments down below!
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