How To Prepare For The Next Stock Market Crash

Summary

  • With the bull market now the longest in history, many investors are worried that another 50+% crash is coming soon.
  • The good news is that economic and market history shows the next recession and bear market are likely to be far milder than most people fear.
  • The bad news is that eventually a recession/bear market will happen, which is why good risk management is essential.
  • That doesn't mean trying to time a bear market, which studies show is nearly impossible. In fact, attempting to sit out a bear market could sink your long-term financial goals.
  • Rather proper asset allocation, including holding enough cash to meet short and medium-term needs, is the best way to prepare for a bear market.

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Note that due to reader requests, I've decided to break up my weekly portfolio updates into three parts: commentary, economic update, portfolio summary/stats/watch lists. This is to avoid excessively long articles and maximize the utility to my readers.

This week there is no economic or portfolio update because I'm on vacation with my family over Labor Day Weekend.

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Given that the last two bear markets have seen stocks plunge by 50% or more, it's understandable that many investors are nervous that stocks (SPY) (DIA) (QQQ) might crash again. That's especially true now that we're in the longest bull market in US history, and the financial media continues to provide us with plenty of prophets of doom that boldly declare a major market crash is inevitable.

While the risks of a recession and the bear market that inevitably accompanies it remain very low today, eventually a downturn in both the economy and stock market will happen.

So let's take a look at what economic and market history can teach us about what the next recession is likely to look like. More importantly, find out why fears of a 50+% market crash are likely overblown, but what you can do to prepare your portfolio for when the bears finally do run wild on Wall Street.

The Next Recession Likely Won't Be As Bad As The Last One

Bear markets (when stocks fall 20+% from all-time highs) tend to only occur during recessions. The Great Recession was one of the most traumatic events in our nation's history. It's thus understandable that many people fearing the next economic downturn will be a repeat, with disastrous ramifications for employment, personal finances, and our portfolios. The good news is that the Great Recession was not a typical economic downturn.

For example, according to the

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