Eventually, the stock market will crash again. While unpleasant, these extreme downturns come with the territory of investing. And for investors who don’t prepare for such events or know what to do when they hit, it can be financially crippling.
But while another crash is inevitable, there’s a big question mark over when this might happen. There are plenty of bearish investors predicting it could be as early as 2025!
Timing a stock market crash is hard
When looking back at previous market downturns, it’s easy to say “I should have sold right at the peak”. Unfortunately, when in the moment, it’s almost impossible to figure out when a crash is going to suddenly turn up.
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Even the professionals get it wrong constantly. For example, back in June 2023, expert investment analysts working at Deutsche Bank announced their prediction of a US recession starting four months later in October. Well, October came and went. And for the investors who listened and sold out have subsequently missed out on almost 50% of total returns when looking at the S&P 500.
Legendary British investor Jeremy Grantham has also predicted the S&P 500 could be slashed in half multiple times throughout the last decade in 2014, 2018, 2022, and even 2024. But once again, those who listened each time have also missed out on game-changing long-term gains.
This isn’t to say that bearish predictions should be ignored. There are some valid concerns circulating right now regarding the global economy, geopolitical conflicts, and artificial intelligence (AI) spending. But it goes to show how unpredictable the stock market can be.
How to prepare for a stock market crash
Personally, I think a correction among some overvalued tech stocks might be in order. But a full-blown market crash seems unlikely. Nevertheless, let’s assume the worst and say shares will fall off a cliff at some point next year. What should investors do? In my opinion, a sensible move is to start building cash.
Right now, about 5% of my portfolio is sitting as cash, earning a bit of interest on the side. With valuations starting to get a bit frothy, I’m aiming to increase this closer to 10% over the next six months. Why? Because if a crash does end up materialising, that means a lot of terrific companies are going to be cheap.
This is the same tactic I deployed in 2021. When the stock market correction caused US shares to plummet, I used my cash reserves to start buying more shares in Shopify (NYSE:SHOP), among others. Surging inflation triggered an online spending slowdown that sent the e-commerce giant tumbling by over 80%!
However, seeing the problems at Shopify as only temporary, I was able to use my cash reserves to snap up more shares steadily throughout 2022. And these trades have since gone on to deliver over 200% returns.
There’s no denying that Shopify’s current valuation comes with a premium. As such, I wouldn’t be surprised to see the stock price nosedive once again should the bearish predictions of a stock market crash come true in 2025. But so long as the underlying business’s long-term strategy remains on track, I’ll be eagerly waiting to buy even more shares at a discount, along with other top-notch stocks within my portfolio.
