ITS TIME TO PANIC!!!
The Core Curriculum 28: How Pretending a Market Crash Is Coming Helps You Prepare for One
“Sell everything,” “put everything in gold,” “the big crash is coming,” “stock prices are too high.”
This is just a sampling of the discussion that happens in online forums and in the financial news every single day. Fear gets attention, and the fear of losing money draws eyeballs like nothing else.
A recession may or may not be coming, but over the last few weeks and months, my financial media consumption has rapidly increased in pessimism, a.k.a. bearishness, about the stock market and the economy as a whole.
I have no idea where the economy or the stock market is headed over the next few years, and anyone who claims they do should be ignored immediately, because no one can predict the future. Even Warren Buffett, one of the greatest investors of all time, has frequently said that timing the market is impossible.
It’s important to remember that nearly 45% of all trading days since 1952 have been within 5% of an all-time high, and 12% have been within one percent of a record high.
When you see a headline that the market is closing at an all-time high and you feel that pull of dread that a crash might be coming, it’s important to remember that over time, the stock market grows in value. The market closing at an all-time high is not indicative of an imminent crash.
But given this, what steps can be taken to prevent a catastrophe? After all, with the S&P 500 up over 75% in the past five years, well above its long-term average of 10% annually, it does feel that a crash might be looming.
Prepare for the Worst
My solution is simple: I perpetually pretend that a massive stock market crash will happen within the next two years. My personal finances reflect this, and I will continue to act as if a massive correction is on the way.
This doesn’t mean I’m selling all my stocks and hiding cash under my mattress, although the modern equivalent might be going all-in on bitcoin and hiding my flash drive there.
Preparing for the worst in practice means identifying my goals and objectives with different holdings and investments. For example, my S&P 500 shares, held through the SPYM exchange-traded fund (ETF), would likely fall by 50% or more in the event of a major market sell-off.
If I needed that money for a home purchase, car repairs, or college tuition within the next year or a couple of months, it would be very unwise to keep it invested in the stock market, since any given day has roughly a 46% chance of closing in the red.
Additionally, roughly 40% of months historically have been declining. Even quarterly, 30% of the time, the market turns down during any given three-month cycle.
Based on roughly 100 years of stock market data going back to 1926, on average, the stock market decreases 25% of the time in any given year, meaning that in five years, there’s a very high likelihood that your investments will lose money on paper at some point during that timeframe.
Time Horizon Matters More Than Market Timing
If you intend to use your wealth within the next five years, you should keep it out of the stock market. It is often difficult to do that. Recently, the stock market has been growing at a rate above its historical annual rate of 10%, with the S&P 500 climbing more than 12% last month alone. Most people seem to fear missing out; however, a single 50% decline can wipe out many months of double-digit gains.S
It would take six straight months like the S&P 500’s 12% gain in April 2026—a growth rate never even achieved in the U.S. market—to match the effect of a single 50% dip at the end of that time period.
The best thing you can do to prevent yourself from losing money that you can’t afford to lose is by identifying the timeframe for which you need to use it. For any cash that you have an active use for within the next one to two years, you should keep it in a money market fund or high-yield savings account.
Read more on how to maximize your cash:
Hold Cash the Smarter Way
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If you have a use for your money within the next two to five years, that is the trickiest timeframe to plan for, as a market drawdown can last for half a decade, as we’ve seen happen historically, on the flip side, assuming a 10% annual return, you could miss out on 50% or more gains like we’ve seen happen in the past five years.
It ultimately comes down to your risk tolerance and how much complexity you’d like to add to your finances. For example, you could invest your mortgage down payment in a low-cost index fund and sell a percentage each year for the first couple of years, then move it to cash in the year or so leading up to your major purchase.
But if keeping all of your down payment money in cash helps you sleep at night, that might be a better option.
Time in the Market Wins
Keeping your money invested in an index fund almost always makes sense over the long term. Any time frame beyond five years gives you enough time to ride out any drawdowns in the stock market. However, it’s important to remember that your investments can turn sour towards the end of your saving or investing journey.
The longer time you have for your investments to compound and grow, the better you can feel about staying invested in the stock market.
I don’t know where the market is going. And while it’s true that stock prices, measured by the price-earnings ratio (P/E) of individual companies, are well above a long-term average, the same could have been said last year and even the year before that.
While the market is doing well right now, it is essential to recognize your own risk tolerance and time horizon for your investing journey. If anyone figures out how to reliably predict the future, my inbox is open!
Got questions, disagreements, or a money topic you want broken down next?
Shoot me an email at Crawford@awmfinancial.net or visit awmfinancial.net
This content is for educational purposes only and is not investment advice. Markets are risky, outcomes vary, and you should always make decisions based on your own situation.
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I think one of the strongest points here is that financial decisions become much clearer when people understand their actual time horizon. A lot of panic comes from treating short-term money and long-term investing money the same way. Preparation and panic are two very different mindsets, and this article explains that distinction really well.