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How to Prepare for the Next Crash?

First of all, I have no clue when the next market crash will come. Neither is it important to know the exact date.

Having said this, there are many clues that the next market correction may come soon. The FED may expect it as indicated by the flattening yield curve of US government bonds. Yet, I don’t give much attention to what “gurus” believe the market will do (they don’t know). It simply does not matter because trying to time the market is a sure way of underperforming the market for the majority of active investors.

Instead of trying to anticipate the concrete timing of the next market crash, the best thing you can do is to be prepared and stay prepared. And if the next crash comes, you’ve nothing to fear.

  • Have a solid cash position of 3x to 12x your monthly income. If you earn $5000 per month, keep $15,000 to $60,000 in cash or cash equivalents. This will not only protect you from any short-term crisis in case you suddenly lose your income. It will also ensure that you are always liquid enough to buy things when everybody else is forced to sell. Again, this cash position is not there to time the market but to give you protection and peace of mind. But it’s also an opportunity that you may or may not decide to use when prices hit rock bottom (as in 2018) in plain sight and for everybody to exploit.
  • Watch out for the anti-fragile investments. Have you read the excellent book “Antifragile” from Nasim Taleb (wiki)? He advises to invest 80% of your money in extremely safe investments (e.g. short term gov. bonds with excellent ratings) and 20% of your money in extremely risky investments (e.g. options). While this strategy may be a bit extreme for most investors, we can still learn something out of it. For example, cash is an “antifragile” investment because if there is a market crash, you can buy stocks cheaply. Roughly speaking, with cash in your portfolio you don’t mind drastic market downturns. Read more about the idea of antifragility in this excellent blog post.
  • Have multiple stable long-term flows of income. If markets are down and people lose their jobs, it is vital to have a stable supply of cash so that you can take care of your family and even buy cheap assets. A great idea would be to have three sources of income: your job, your investments, your passive income streams, your side income business (e.g. as a Python freelancer). If one or two of them fail, you can quickly shift your attention to improving the other ones. With this income distribution, you have a lot of protection against any economic downturn.

Do you have ideas of how to prepare against the next crash? Leave a comment below!

Disclaimer: I am not a professional advisor and you should not take this as financial advice. It’s just my opinion as an interested participant in the market.

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