With recent inflation news leading to another sell-off in stocks, investors are once again becoming worried about the future. After all, high inflation means the Federal Reserve should continue to be forced to raise interest rates, which makes bonds a relatively more attractive investment. Higher interest rates also make borrowing more expensive, making it harder for businesses to invest in expansion, putting demand and growth at risk.
In this context, it is quite easy to argue in favor of Why the stock market could crash again. Moreover, history shows that the market Is crashes from time to time. As a result, the answer to whether the stock market will crash again is simple: yes, it almost certainly will. The real question to ask, however, is when will it crash?
Are we already there?
Despite this fear, the reality is that the S&P500 is already down about 20% from its recent highs. That’s already a substantial drop, and it offers a glimmer of hope that perhaps the most difficult part of the current market cycle may be behind us.
Still, it’s important to remember that the market attempts to price stocks based on their future abilities to generate value, not based on their past price movements. One of the main reasons equities sold off so strongly when recent inflation figures were announced is that the figures were worse than expected.
When the market faces substantial negative surprises, it tends to lower asset prices to reflect the higher perceived risk and/or lower perceived future returns. As a result, much of the question of whether the market will crash further soon depends on how many negative surprises await us.
What can you do there?
With so much uncertainty about the market and the short-term future, it can be tempting to get bogged down by doing absolutely nothing at all. While keeping the course is usually a great strategy when it comes to participating in any recovery from a crash, you need to have the right financial foundation in place to really do it.
Accordingly, is now a stunning it’s time to check your financial footing and do what you can to shore it up. That way, when the market crashes again – whenever – you’ll be in a better position to take advantage. On the other hand, if the market doesn’t crash again in your investing career, having a solid financial foundation in place will always give you great peace of mind, even in more typical market volatility.
The key to your financial foundation is to control your debts. The only reasonable debts to have when investing are those where all three of the following conditions are true:
- The interest rate is low – interest free or in single digits.
- The payment is low enough not to prevent you from covering your basic costs.
- Debt serves a useful purpose for your future.
If your debt doesn’t meet these three criteria, making it a priority to pay off those debts or get them where they fit the bill can do wonders for your financial future.
Once your debt is under control, make sure you have a decent – but not oversized – emergency fund in a savings account, CDs, or another very liquid and secure vehicle. Three to six months of your living expenses is a reasonable goal. Too much more than that, and you risk losing too much ground to inflation. Too less, and you risk not having a tampon big enough to cover those nasty surprises life throws at you.
With your financial foundation in place, it becomes much easier to focus on your future and the longer-term opportunities that stocks can provide. Indeed, if you get this foundation firmly enough in place, it can even turn your perspective of stock market crashes into one where you appreciate the buying opportunities they may offer.
Recent market declines painfully show that another crash is very possible. The sooner you get your financial foundation in place, the sooner you’ll get to a point where you can start to see a stock market crash as a potential buying opportunity rather than just a reason to panic. So start putting your plans in place now and make today the day you start building the foundations that can help you emerge from the next stock market crash in a much better place.