The stock market will collapse again. When exactly that will happen, it’s about my ability to predict, but the fact that it will happen at some point is about as close to a certainty as you can get in investing. If you are worried about the event and the effect it will have on your family, you are not alone. You should consider the concern as a sign that you are not adequately prepared to deal with the impact of your accident on your finances and plans.
With the right plan, financial structure and perspective in place, a mere market crash is nothing to worry about. As long as capitalism itself remains intact, market accidents often bring seeds of their own rebirth – as the exploding dot.com bubble laid the foundation for today’s internet titans. The key for investors is to realize that this is how the market works and should be prepared in advance. With that in mind, here are five reasons not to worry about a stock market crash.
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1. You do not need your money right away
Precisely because the market can crash, money you have to spend in the next few years should not be invested in stocks. The last thing you want to happen is to be forced to sell more shares than you intended to cover an account. If this happens to you, you will have less money to participate in the recovery that follows, thus reducing the prosperity with which you end up.
Instead, the money you need for the next few years should be kept in a savings or money market account, CDs or a treasury or investment grade bond study. You do not earn a high return on the money, but you have a much greater chance that the money you need will be there when you need it. Knowing that the money you need is there when you need it is a great way to drive out a weaker market.
2. You do not use any margin
In strong markets, the leverage margin can increase your returns and make you feel like an investment genius. However, when things get sour, the magnifying effect works against you. Not only that, but your broker also has the right to change the terms of your margin agreement at any time for any reason. Often this means that it becomes more restrictive during a declining market, which would cause any margin challenges you bring with even bigger problems than it already would be.
If you do not use margin, you can not be forced due to falling stock prices, no matter what the market does. This makes it much easier for you to get through the accident. and continue to invest as the market turns upwards again.
3. You put it away a bit, just in case
One of the challenges you may face when the market collapses is that there is often a good economic reason to drive the market down. After all, stocks are priced based on the expectations of the outlook of the underlying companies, and if the outlook sours, their stock prices should reflect this quickly. In addition, if a business expects less growth or actively shrinks, it can eventually reduce the number of jobs that lead to redundancies.
With an emergency fund with about three to six months of expenses in it, you can be prepared for a temporary disruption of your income stream. It can help you reduce the temptation to pull money out of the market if your job starts to feel insecure, and also give you a little respite if you lose your job.
4. Your dividends are still paid
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Although market prices on stocks are based on future prospects, companies usually pay their shareholders dividends based on the actual cash they generate today. If a company is able to maintain and pay its dividend even when its share price falls, it is usually a sign that its leadership believes that any challenges will be short-lived and that its core remains solid.
In addition, dividends usually come in the form of cash. This cash is money you can use to raise your emergency fund, cover some of your expenses or reinvest in the market. Dividends during a bear market can be an excellent source of money to invest because it already has cash in your account that you do not have to sell or to buy new money away to be available.
5. You acknowledge that your shares are of interest in companies
An equity stake is nothing more than a fractional stake in a company. If you own shares, you really own a part of the business. The price of the shares on the market rarely has an impact on the ability of the company to operate, make a profit or pay its dividends.
If you like a company well enough to buy its shares at $ 100 during a bull market, why would you not be more excited to buy its shares at $ 40 during a bear market? As long as its operations remain solid and its prospects remain proper, a market crash gives you the opportunity to buy even more shares in the business for the same cash expense. This is one of Warren Buffett’s most successful strategies, and it’s just as mortal available to us as the Oracle of Omaha.
Get ready for the next market crash
The market is always moving up and down. If your financial life is structured according to the assumption that stocks can only rise, you have every reason to worry about the next time the market collapses. If, on the other hand, you build your plan according to the factors mentioned above, you will be in a much better place to catch the next market crash and appear in a better place on the other side.
A market accident can still be scary, but if you are well prepared for it, you will have so much less reason to worry about it.