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This SQUASHED My Fear of the Stock Market CRASH

Here we are with not one, but two conflicts going on in both Europe and the Middle East. 

Are you stressed out by the looming stock market crash that you keep hearing about? You could lose your investments and retirement savings. You could lose your job and your home. You could end up being this guy in a post-apocalyptic future where bottle caps are the new currency.

Regardless of the grim situation you are imagining yourself in, one question must be answered. WHAT DO? 

In this video, I’m going to distill down the three causes of a stock market crash based on historical evidence and what you should do in each situation to come out on top. Let’s get into it.

On the go? Watch my video here:

THREE CAUSES OF A STOCK MARKET CRASH

First, it is important to remember that all three causes have one common thread: fear and uncertainty. 

Even if the initial reason for stocks dropping is legit, the downward momentum due to fear and uncertainty will push the market lower than the theoretical real value. When the market falls into the deep end, the sharks of the investing world start to feed. 

Unfortunately, if you’re like me, you do not have mountains of cash. Your tactics will be different, which we will come back to.

1. Catastrophe

The first cause of a stock market crash is a catastrophic event.

Pandemic

A perfect example in recent memory is the 2020 stock market crash due to COVID-19. 

Historical Returns on S&P 500

In March of 2020, the S&P 500 dropped nearly 34%. Unemployment shot up to nearly 15% at its peak. But worst of all, we had to wear masks.

Civilian Unemployment Rate

Fortunately, COVID-19 seems to be largely behind us. The chances of another stock market crash due to COVID-19 are very low, but that’s not the only type of catastrophe. 

War

The Gulf War recession took place between July 1990 and March 91. When Iraq invaded Kuwait, it caused the price of oil to rise quickly. Rising oil prices tend to push inflation higher and higher, and are heavily correlated with economic recession.

Crude Oil Prices in Relation to World Events before 2006

And here we are with not one, but two conflicts going on in both Europe and the Middle East. Between Russia-Ukraine and Israel-Gaza, it is a safe bet that the oil industry will continue to be affected.

Historical Trends in Crude Oil Prices

As you can see from this graph, from the US Energy Information Administration, oil has recently come down a bit from its peak in the middle of 2022, the same time that we experienced peak inflation. 

If either of these conflicts (pandemic or war) picks up and the price of oil jumps again, we could be in for another round of rising inflation.

WHAT DO?

So what is the best way to invest in this situation? In high inflation, the cost of living is on the rise, and one of the major costs that can go up is rent.

Real estate tends to perform well in times of high inflation since rentals can push the extra costs onto tenants. This graph shows the average monthly cost to own, in blue, and the average monthly cost to rent, in red. Notice it does not matter if the housing market is going up or down, rents are always going to go up with inflation.

Historical Trends on Cost to Own VS Cost to Rent in Real Estate

So, should we go out and invest every dollar we have into REITs? 

Not quite.

2. Economic Bubble

Our strategy will need to be a little more refined because of the second major cause of a stock market crash: a bubble.

Housing Bubble

I would venture to guess everyone watching this video is familiar with the 2007–2008 financial crisis, which coincided with the bursting of the United States housing bubble. 

Historical Trends on REIT (Real Estate Investment Trust)

It is notoriously very difficult to spot a bubble and even more difficult to know when it will pop. In fact, a whole movie was made about a guy who managed to spot the US housing bubble and actually profit big time. 

Even though rents might technically go up, investing heavily in real estate just before a real estate bubble pops is not ideal. You want to be in a position to invest after the bubble pops. We can safely assume that you or I won’t be able to spot one with 100% certainty.

Investing just before the pop means your returns will lag behind the greater market and carry a lot of risk from knock-on effects that we will discuss later on.

Dot Com Bubble

Another example of a bubble bursting is the 2000 dot com bubble where internet and technology-based companies took a huge hit. 

Just like the housing bubble, the market was greedy. The technology sector was overvalued, and when internet and tech startups began to fail, resulting in their stock prices going to zero, market greed turned into market fear. Massive sell-offs caused investors to lose an estimated 5 trillion dollars.

Reactionary public panic about a stock market crash can also be a major contributor to it, inducing panic selling that depresses prices even further. 

The price of a stock is only worth what the market is willing to pay. If there is enough fear in the market, the stock prices of many companies will drop below their theoretical real value.

WHAT DO?

So, should you pull all of your money out of the market to avoid getting tagged by the next bubble? No. 

High inflation is strongly correlated with stock market crashes. Not investing just means you are sure to lose buying power due to inflation.

Historical Returns on Bitcoin

Be careful not to overexpose yourself to sectors where investors seem overly greedy. For instance, in 2022, Bitcoin was on an absolute tear until it dropped more than 70% from its all-time high. To this day, Bitcoin is valued at less than 50% of its all-time high.

Warren Buffet says it best. 

Everyone knows you’re supposed to buy low and sell high, so why do people sell at the bottom?

3. Economic Recession

The main reason that people get their investments and retirement savings wiped out in a market crash is because of the economic recession that either causes the crash or is a knock-on effect from the crash.

Boom-Bust Cycle

The economy generally follows a boom-bust cycle

Boom-Bust Cycle

During expansion, the economy experienced a period of healthy and sustainable economic growth. Employment rates increase. Lenders make it easier to borrow money by providing low-interest rates. This results in higher spending, higher demand, and higher production rates until a peak is reached. 

A peak is the highest point of a business cycle. Asset prices rise too rapidly and consumers take on too much debt. The expansion is over and a contraction begins, otherwise known as an economic recession.

The US economy has gone through this cycle many times. The duration of the different segments will vary greatly, but on average, we experience one full cycle roughly every 5 years

Sometimes the cycle plays out naturally as the economy overheats and cools off. Other times, a recession is brought on by a catastrophe like COVID-19 or the bursting of an asset bubble like the US housing crisis.

Economic Bubbles in the US

6 Characteristics of an Economic Recession

Regardless of the cause, there are six characteristics that are commonly associated with economic recession, and they all feed off each other.

Characteristics of an Economic Recession

Initially, production is racing to keep up with consumer demand until rising inflation causes consumers to cut back on purchases. 

As consumers cut back on purchases, businesses are forced to cut back on production. 

Less production means unemployment will rise, resulting in more people and businesses cutting back. And I think you get the idea. 

When this death spiral occurs, the gross domestic product will inevitably decrease and the stock market will plummet.

WHAT DO?

The answer isn’t sexy. You need to give yourself a buffer. 

High-yield savings accounts and money market accounts are yielding 4% to 5% at the moment, which is a solid return. 

You will still be making a decent return on this money while avoiding the huge downside of having to sell your investments at the bottom of a bear market.

Take Home

After you have an appropriate emergency fund in place, you can feel free to buy the dip. 

Just be sure that you diversify across all sectors of the economy so that your portfolio will perform well during times of high inflation, and you won’t get blasted if a market bubble breaks. 

If you enjoyed the article and would like to learn more about creating a financial safety net, please be sure to check out This Strategy CRUSHES Roth IRA Investing | Retirement Planning for Beginners where I go over the cheapest and most efficient way to guarantee your retirement. 

Until next time.

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