How to Prepare for Stock Market Crash?
📉The S&P 500 $SPX500 is 𝙙𝙤𝙬𝙣 𝙗𝙮 𝟭% 𝙛𝙧𝙤𝙢 𝘼𝙏𝙃 and for some reason, people are panicking about it. A correction is a 10% drop while a crash is a 20% drop. We are far from a correction or a crash but sooner or later they will come and it is important to know how to prepare ourselves against them.
🎲 Nobody knows what the market will do today, next week or next month. It is 𝙞𝙢𝙥𝙤𝙨𝙨𝙞𝙗𝙡𝙚 𝙩𝙤 𝙥𝙧𝙚𝙙𝙞𝙘𝙩 𝙩𝙝𝙚 𝙨𝙩𝙤𝙘𝙠 𝙢𝙖𝙧𝙠𝙚𝙩 𝙤𝙧 𝙩𝙤 𝙩𝙞𝙢𝙚 𝙞𝙩. But we can always look at different scenarios of what may cause a crash. There's, however, always the possibility that something we didn't predict comes and crashes the market. For example, a pandemic, a war or an alien invasion.
🏦 The main reason why stock prices are so high today is because of 𝙌𝙀 𝙛𝙧𝙤𝙢 𝙩𝙝𝙚 𝙁𝙚𝙙𝙚𝙧𝙖𝙡 𝙍𝙚𝙨𝙚𝙧𝙫𝙚 𝙎𝙮𝙨𝙩𝙚𝙢. If eventually, we have higher inflation, the Fed will have no choice but to raise interest rates. So, they might be the reason for the crash.
☎️ Another possible cause of a crash might be 𝙖𝙣𝙩𝙞𝙩𝙧𝙪𝙨𝙩 𝙥𝙧𝙤𝙗𝙚𝙨 𝙖𝙣𝙙 𝙧𝙚𝙜𝙪𝙡𝙖𝙩𝙞𝙤𝙣𝙨 on the big tech. Apple $AAPL , Microsoft, Facebook, Google and Amazon are 22% of the S&P 500 today. The bubble is only in a few stocks.
🎰 This stock market bubble has led to much 𝙨𝙥𝙚𝙘𝙪𝙡𝙖𝙩𝙞𝙤𝙣. For example, we can see a high correlation between Tesla $TSLA and Bitcoin $BTC . The problem with speculators is that as soon as they see a 1% drop, they are scared and they start selling, causing an actual drop.
💸 It is important to have 𝙡𝙤𝙬 𝙘𝙤𝙧𝙧𝙚𝙡𝙖𝙩𝙞𝙤𝙣 𝙬𝙞𝙩𝙝 𝙩𝙝𝙚 𝙢𝙖𝙧𝙠𝙚𝙩 and avoid stocks with high institutional ownership. Diversifying in other asset classes such as cash, bonds and gold $GOLD can be dangerous, especially with cash and bonds as the yields are lower than inflation. I have some cash and cash equivalents in my portfolio but that's only temporary after the GameStop $$GME profits and I'll be using them to buy stocks.
🏭 Best way to prepare for a crash is to 𝙛𝙤𝙘𝙪𝙨 𝙤𝙣 𝙛𝙪𝙣𝙙𝙖𝙢𝙚𝙣𝙩𝙖𝙡𝙨. You can never go wrong on fundamentals. What investors expect over the long-term when investing in a company is cash flow. Even if the stock market is down 90% and we have a 20 year bear market, if you hold a great company, you have nothing to worry about. The more it crashes, the more you buy.
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