Search
  • john1828

Stock Market Crash Protection Strategies

Updated: Jun 8

Start your financial plan today.




There seem to be questions circulating whether or not the stock market is going to crash. The answer, unequivocally, is absolutely.


Since the beginning of markets we have always had stock market crashes. The question investors ought to be asking themselves is not if the market will crash - but how prepared are they for that crash. Stock market crashes are not black swan events. Over the last twenty years, we have seen three massive market downturns. The plain and simple truth is that market crashes need to be built into an investor's investment plan.


The largest concern to an investor, especially a retiree, should not be how significant a market decline will be, rather how long the market will take to reach its previous market high. This is the most important aspect for a retiree to understand.


In investing, there are two questions that need to be answered. The "What will happen?" and the "When will it happen?". The "what" is most certainly the easier one of these questions to answer. The "when" is the more difficult part to get correct. Ultimately, investors need to make sure when they are incorrect in trying to answer these questions it does not destroy their portfolio.


A retiree needs to understand their two main options in a market crash: 1. Have the cash position to outlast the bear market. 2. Have already diversified themselves away from the bear market. In my opinion, both defensive options need to be attempted.


If an investor takes a long term view at the Dow Jones Industrial Average-- everyone will notice that markets have always recouped losses that have occurred in a market downturn.



If we know that markets will almost always recover--Let's explore the "when" portion of the equation by looking at various market crashes throughout history.



COVID-19 BEAR MARKET FROM MARCH 2020-DEC. 2020.

This bear market was a fast, severe downturn with a remarkably quick recovery for the circumstances presented. For investors/retirees that stayed invested ,they weathered the storm rather quickly.


Time to recover: 10 months

Avoidable via diversification: No




HOUSING BUBBLE MARKET CRASH 2008-2013


This bear market was severe and was felt around the world. The event ultimately changed central banks for years to come. This bear market challenged even the most conservative cash balances held for retirees.

Time to recover: 5 YEARS

Avoidable via diversification: No






The above mentioned market crashes are recent crashes that only had one main defense: High cash savings rate. Diversification alone would not have sufficed to protect investment balances worldwide. Let's explore more secular market crashes where diversification would have offered protection.


It is important to note the following-- Most investors feel diversified when owning one large index. For example, the S&P 500. Most may consider owning this index a diversified portfolio, when in fact, all they have done is set up a concentrated portfolio relying on one country's performance. There are many instances in history where this secular investment approach has crushed portfolios for extended periods of time. This approach can even leave portfolios vulnerable to never having enough cash to survive that particular bear market.



2000 DOT-COM NASDAQ BUBBLE BURST


The Dot-com bubble burst had its largest effect on the Nasdaq composite. This was an 80% haircut.


Time to recover: 14 years

Avoidable via diversification: Yes




JAPAN'S NIKKEI 28 YEAR LONG BEAR MARKET


The Nikkei is Japan's version of the American S&P 500. Japanese investors were crushed by their extended bear market. The average retiree certainly did not have the cash reserves to outlast this bear market.


Time to recover: 28 years

Avoidable via diversification: Yes




EUROPE'S FTSE 100 20 YEAR LONG BEAR MARKET


The FTSE, Europe's version of the S&P 500, found itself in a significant bear market starting in the late-90's.


Time to recover: 17 years

Avoidable via diversification: Yes






CAN THIS TYPE OF LONG BEAR MARKET HAPPEN IN THE UNITED STATES? WELL...IT ALREADY HAS.


Let's focus on a specific time period from the very first chart seen at the top. For this time period we can only show the Dow Jones Industrial Average. The S&P 500 was not created until the 1950's.



The Great Depression occurred in 1929. The Dow Jones Industrial Average did not reach those highs again until 1954.


Time to recover: 25 years.

Avoidable via diversification: Unlikely





WHAT IS AN INVESTOR/RETIREE TO DO IN A MARKET MORE RELIANT ON STOCKS THAN EVER?


STEP 1: Retirees need to thoroughly understand the two bucket retirement approach. This approach will help navigate market downturns that can be resolved with cash reserve discipline. Non-retirees need to stay invested and not lock in those losses. This is a much easier feat when people have a high cash reserve. Hopefully this figure can cover 6-12 months of living expenses.


STEP 2: Intelligent social security planning. For circumstances illustrated in the Nikkei and Europe's FTSE 100-- the 'wait as long as you can approach' for retirees would be the most beneficial.


STEP 3: Consider investing in a world stock index. There are indexes that own almost 8,000 stocks throughout the world. This approach may be the only one that allows investors to both own stocks and avoid vulnerabilities to any one country's particular problems.


Read next: Is the US in another Housing Bubble?



John Lawrence is an investment advisor and founder/owner of J.A. Lawrence Wealth Management.


Contact us here.


PLEASE SUBSCRIBE BELOW IF YOU ENJOYED THIS ARTICLE!


509 views0 comments