Learn why a stock market crash doesn’t matter to reaching your investing goals and what to do instead
The market is on edge lately. Inflation is creeping up, the Federal Reserve is taking away the easy money policy that was boosting stock prices and the stock market is at a price-to-earnings it’s only been at twice in history.
Everyone is calling for a stock market crash.
In this video, I’ll show you why none of it matters and how you can invest in any market to beat your financial goals. I’ll show you how to make investing personal by customizing your plan for your needs and how to never worry about your investments again.
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Does a Stock Market Crash Even Matter?
Here’s something you won’t hear on all those investing shows, it doesn’t matter! That you need to worry about a stock market crash is one of the biggest investing lies told to you by Wall Street.
I know because I was once part of that Wall Street machine, an equity analyst predicting the ups and downs of the market. In our third of this five-part series on investing mistakes and lies, I’m going to show you why a stock market crash doesn’t matter and what you can do to get the most out of your money.
I’ll be revealing two reasons why stock prices are the least of your worries then give you three rules for investing in any market, so let’s get started!
Why is the Stock Market so Dangerous Right Now?
Stocks do happen to be historically expensive right now. The price-earnings for the S&P 500 is over 25-tiimes, that’s a high it’s only been at twice before – in 2000 and before the Great Depression, and neither of those times worked out well for investors.
So naturally every pundit and analyst on Wall Street has an opinion about when the second-longest bull market is going to come crashing down. It’s never a modest correction by the way, it’s always a call for a cataclysmic plunge because that’s more exciting.
I’ve found quotes from just about every big name investor all the way back to 2011 predicting a stock market crash.
But do you ever wonder why these analysts and investors are never questioned about their predictions when they don’t come true? Why doesn’t anyone call them on it?
Because Wall Street loves it! By constantly scaring the bejesus out of you, by constantly putting you in a panic over stocks, Wall Street knows you’ll keep coming back, keep watching for every news story and analysis. That means they can sell billions in advertising and sell you into their brokerage services.
You know what Wall Street’s dirty little secret is, the truth that they won’t tell you on CNBC? Stock market crashes don’t matter!
Yes, it sucks to see your investments plunge by half and it’s great to think that you can get out before it happens, especially if all it means is regularly tuning in to your favorite investing show.
Now if you’re managing someone else’s money, if you’re an analyst or a financial advisor, then yes stock market crashes matter. You better be a good steward of your client’s money. But for the 99% of us, those just trying to meet our long-term financial goals, a stock market crash matters less than you think.
Can Anyone Really Predict a Stock Crash?
Let’s look at two reasons why a stock market crash doesn’t matter before looking at three rules for investing in any market.
First of all, nobody is going to predict when the stock market is going to crash. There will be lots of people saying they did after the fact. I’ve seen at least half a dozen money managers and big investors make a name for themselves, become famous for ‘predicting’ the 2008 financial crash.
The thing you don’t hear is that most of these people were throwing out predictions as early as 2004. It’s ridiculous because you see these people talking up their generic commentary at least twice a week on Bloomberg or CNBC.
They throw out three or four reasons why stocks might crash but of course they always leave it open by saying something like, if this happens then the market could keep going or the first half of the year looks solid but we could run into weakness in the second half.
I love that last one. It’s always the second half of the year that the market is going to be in trouble. That way, if the market does sell off, the pundit can scream how right they were and if it doesn’t well nobody remembers one prediction out of the thousands they hear anyway.
I don’t care if you’re Bill Miller, Peter Lynch or Warren Buffett all three of which are spectacular investors but even they can’t predict a stock market crash. Trying to do so will eat into your returns by hedging or sitting out the market and you’ll go grey stressing out about stocks.
Stock Prices Always Go Up…Eventually
The second reason why stock market crashes don’t matter, and this is the more important one, is because stocks always rebound. Give me one example of a stock market crash when the S&P 500 didn’t retake its previous high.
It took just five years for stocks to recover from the massive crash on Black Friday in 1989, seven years after the dot-com bust and six years to recover from the housing collapse. In every single one of these instances, investors were putting their money to work at bargain basement prices after the selloff and making great investments all the way up.
The fact is, what stocks do over a few years just doesn’t matter to your long-term investing plan.
How to Make Investing Personal
So if worrying about a stock market crash is pointless, how should you invest. Here are two investing rules you can use and two investments that will help smooth your wealth building even when stock prices fall.
First, investing has to be personal. You have to invest according to your personal goals and needs. This starts with figuring out what your goals are. If you’re just saving for some arbitrary number like $1 million then you’re going to fail. You need a real mental picture of what you’re going to do with the money to keep you motivated to save and invest.
Once you’ve got that retirement number, you can use an investing calculator to find the investment return you need to get there.
Investing to Protect Yourself from Falling Stock Prices
Making your investing personal is going to help you in this next stock market rule which is diversifying across different assets. An asset is just a broad group like stocks, bonds and real estate. Because all the investments in an asset class share core characteristics, they all react similarly to economic changes.
Stocks rise when the economy is good while bonds do better when the economy weakens. Real estate does well in a low-interest rate environment and during inflation.
Part of making a personal investing plan and diversifying in these assets is knowing how much to invest according to your age and other needs. I’ve got a chart for how much stocks, bonds, real estate and other assets you might want to buy depending on your age.
These are just rough estimates because your own investments will differ according to your tolerance for risk and other needs. But an investor in their 20s might put 60% in stocks or even more while investing 15% in bonds and 10% in real estate. The other 15% might be in alternative assets and a little in cash.
As you get older, more of your money shifts to safer investments like bonds and out of stocks. By the time you’re in your 50s, maybe you have 50% in stocks, 25% in bonds, 15% in real estate and the rest in cash and alternative investments.
This slowly shifting your investments according to your age, not because you think the stock market is going to crash, is going to keep your money aligned with your long-term goals and your need for return. Holding some money in bonds and real estate is going to smooth out those stock market bumps so you don’t freak out when Wall Street panics.
Investments Outside of Stocks and Bonds to Beat Your Goals
Finally there are a couple of investments that almost nobody is using right now but will help you worry less about your money but still make a solid return. Usually, when people start worrying about a stock market crash, they invest more in bonds. That provides safety but really low returns and people usually get bored making four or five percent.
They pour the money back into stocks and get creamed when the market tumbles.
These alternative investments will help provide strong returns but are not quite stocks so they aren’t going to plunge with the market.
First is real estate crowdfunding. I’ve been investing on RealtyShares and PeerStreet for a while now and love using crowdfunding to balance my other real estate investments. I can invest as little as $1,000 in a property on the two platforms. I get professional management and none of the headaches of real estate investing. I average around 9% on debt investments and up to 14% on equity investments.
The next alternative investment is peer-to-peer lending on Lending Club. I’ve been in p2p loans since my cousin told me about them years ago and have averaged just over 10% annual returns. I only invest in loans from very good credit borrowers, people with mortgages and credit scores over 700 FICO. This helps keep the defaults low and my return higher.
I use the automatic investing tool on Lending Club so those monthly payments on the loans that I receive are automatically reinvested keeping my money working for me.
So check out those two alternative investments. I’ve booked double-digit returns on each, returns that will be safe when the stock market crashes. Yeah, they might not be double-digit but they’re still going to be positive returns which is damn good compared to a 25% or more loss in stocks.
It’s really as easy as that folks. Stop worrying about a stock market crash. It’s just going to cause you stress and to make bad investing decisions like panic selling. There’s no point worrying about whether the market is overpriced. Stocks will fall eventually but they always make their way higher.
Create a personal investing strategy that focuses on your goals instead of trying to beat the market. Invest in different asset classes like stocks, bonds, real estate and peer loans according to your age and return needs. Make your money work for you and enjoy life.