It’s one of the most gnawing fears of any investor: what happens when the stock market crashes? Even those investors who might have a Self-Directed IRA with well-diversified assets know that the stock market crashing isn’t good for the economy. It makes businesses cut back, makes people default on their debt, and leads to potentially calamitous financial circumstances that no one wants to see repeated.
The question isn’t whether they’re bad. It’s what to do about it. So let’s examine these questions: is the stock market headed for a crash, and if so—what should investors do to prepare?
Is the Stock Market Headed for a Crash?
First things first: is doomsday upon us?
Short answer: no one knows.
Long answer: Stock markets tend to work in cycles, and we’ve been living during one of the longest bull markets in history. This has led to a couple of consequences: investors are happy with their returns, but many investors can’t shake the feeling that maybe all of these stock market gains are built on foundations of sand. What goes up, must come down.
There are some worrying indicators that investors should pay attention to. One of them is the “yield curve,” or the ratio comparing long-term treasuries to short-term treasuries. This is considered one of the best “canaries in the coal mine” when it comes to recessions, which is why so many people pay attention to the 10-year minus the 2-year treasury yields. You can find that graph at the Fed website here.
This specific curve did dip into negative territory in mid-2019, with some recovery. But it’s been a steady trip downward for the yield curve, suggesting that now may be the time to start preparing for economic issues—if not outright calamity.
What To Do if the Stock Market Crashes
This section is more appropriately about what to do before the stock market crashes. Because if you have a lot of money already heavily invested in the stock market, selling at a low point would only cement those losses.
Just as the time to prepare your home for a storm is not when the storm is already upon you, wise investors know that stock market crashes and corrections are part of the landscape and plan accordingly. Here are some of the most common strategies they use:
- If you own only one stock while the stock market crashes, yours could be the stock that tanks—the company might even go bankrupt. That’s not what you want to happen. Broadening your diversification allows you to own more than just stocks, though. You can also invest in real estate, precious metals, and other non-traditional retirement assets to spread across the risk. In some environments, for example, precious metals might even increase in value while stocks head down.
- It’s not only important to know how to construct your retirement nest egg to stand up to bad financial weather, but you should have an idea of what to do once the storm hits. In some cases, you might build a strong enough portfolio that your strategy is simply to do nothing and continue building wealth. But even if that’s the case, it’s a good reminder to have when everyone else around you is panicking.
When you own real estate, precious metals, and other alternative assets, a swing in the stock market doesn’t have to be fatal. But if you use a Self-Directed IRA, a Self-Directed IRA administration firm won’t be making investment recommendations, which means you’re on your own. For people who like to prepare, that’s a very good thing.