Smart investors know that stock market crashes are a part of life. But predicting when they'll happen just isn't something people are very good at.
In fact, according to the annual Guaranteed Lifetime Income Study by Greenwald & Associates and CANNEX, just 11% of people with $100,000 or more invested thought a market downturn was likely in 2020 as late as mid-February of this year. And advisers didn't fare much better at their predictions, either, with just 6% of advisers with $15 million or more in assets under management anticipating a downturn this year.
Clearly, a crash did happen despite the fact that so few people thought it would. And while you could argue that it wouldn't have without the coronavirus pandemic, the point is that it's often big surprise events that precipitate some of the biggest falls in the market.
So if investors are so bad at predicting when the market will fall, what exactly does this mean for how you should handle your money?
Image source: Getty Images.
A simple way to survive crashes with your portfolio intact
The best way to avoid losing money in a market crash is to invest for the long term and stay calm when a crash happens.
If you build a diversified portfolio of sound investments, chances are at least some of them will do well even when the market is going down. And the ones that don't may experience some short-term declines but should come back stronger than ever during a recovery. The key is to stay calm, keep your money invested as long as you're confident you picked solid companies, and wait it out.
Smart investors also look at market crashes as opportunities rather than disasters. When the market goes down, don't lament the fact that your current investments are temporarily losing some value. Instead, look at the crash as the chance to buy stocks when they're on sale. Consider actually increasing the amount you invest during the downturn so you can capitalize on bad news to maximize your potential returns.
You want to be smart about how you invest, though, since it can take time for a rebound after a crash. So avoid keeping money in the market that you'll need within the next five years. Otherwise, you might have no choice but to sell at a bad time and lock in losses.
Don't let your inability to predict a crash interfere with your ability to build wealth
You don't need to be able to predict market crashes in order to be a good investor. In fact, Warren Buffett, arguably one of the world's best investors, said: "The years ahead will occasionally deliver major market declines -- even panics -- that will affect virtually all stocks. No one can tell you when these traumas will occur."
But Buffett also knows you don't need to be able to anticipate when a downturn will happen in order to make money: "Predicting rain doesn't count, building the ark does."
If you build your ark by following sound investing principles, crashes shouldn't phase you because you can count on your investments performing well over the long term. So don't worry if you can't predict them: You don't need to in order for your finances to survive as strong as ever.
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June 19, 2020 at 09:46PM
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Investors Are Bad at Predicting Market Downturns -- Here's What You Should Do - Motley Fool
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