Black Monday was the global stock market crash on Monday, October 19, 1987. Worldwide losses were estimated at US$1.71 trillion. I do not want to be too much of a dork, but in light of the current situation, this could easily happen again.
Why a next surprise Black Monday could easily happen again
In the current situation, there are a number of things that could cause stock prices to fall, even causing a market crash. Some of the most important are:
- A nervous fear that stocks are significantly overvalued and are almost certainly due for a correction
- The persistent US trade and budget deficits
- Fear that the dollar could fall due to massive tariffs on imports, followed by a trade war or a crisis of confidence
- Uncertainty about inflation and the direction of the interest rates
- Exacerbation of the fall due to high-frequency trading algorithms
When Black Monday happens again, are you ready?
Let’s dive into how you could prepare for a market crash and figure out if you should.
How you could prepare for a market crash
If you think a market crash is just around the corner, you could use any of these investment tactics to protect the value of your investment portfolio.
Each of these tactics has a different goal and strategy, depending on market conditions, risk tolerance, and investment objectives. Here are some of the pros of each.
Buying put options
When you buy put options, you’re purchasing a contract that gives you the right (but not the obligation) to sell an asset (for example a stock or a complete index) at a specified price before a specific date.
When the stock market crashes, this contract will be worth a lot more than you paid for it. It’s a hedge against losses for a small upfront cost. And when the market does not crash, your maximum loss is limited to the premium paid for the option.
Short selling stocks
Short selling in essence is borrowing shares of a stock you believe will decrease in price, selling them, and later buying them back at a lower price to return to the lender.
This tactic will provide money when the market crashes, because you sell at a high and buy at a low. The ideal situation. Just be aware that short selling carries high risk, as losses can be theoretically unlimited if the stock price rises.
Selling all your stocks
When you are really fearing a crash, you could of course sell all your stocks. This will free up cash and reduce exposure to the market. Your profits are realized and your possible losses will not happen when a market crash happens.
Putting your money in a money market fund
You could invest in a low-risk fund that typically holds cash equivalents, such as Treasury bills and commercial paper.
These Money market funds are considered safe, low-volatility investments. They are easily accessible, and ideal for short-term goals or emergency reserves.
Keep in mind that each approach has its own trade-offs and risks. If you apply them, make sure they align with your financial goals, risk tolerance and time frame. You’re the master of your destiny.
Should you prepare for a market crash
Ultimately, it’s up to you. You’re the only one who can decide whether or not you prepare for possible future situations. But…
I’d say it’s probably a good idea to think about what you’ll do if the market takes a turn for the worse.
If you do, the most important things to keep in mind are your investment goal and time frame. These two things should be at the top of your mind when you’re making decisions about what to do in case of the next Black Monday.
The time to buy is when there’s blood in the streets
I’m not in a position to give you any solid advice on what you should do with your investment portfolio. One thing I can tell you is that your mindset is very important when you’re dealing with a crash.
So, at the very least, you should be mentally prepared. Your mind has to be ready for a crash. Because it is not a question of when one will happen. It’s only a question of when that next market crash will happen.
Imagine how you would feel when that happens. What would you do? Are these actions really the right thing to do? What is the right thing to do?
Think through different scenarios, keeping your goal in mind. Then decide what actions, if any, you should take. Make a plan for what to do in such a crisis situation.
What my parachute looks like
My parachute, my plan B, looks exactly like my business as usual. I mean in case of a market crash I will keep doing the same I have been doing for a while. I will keep buying and building my portfolio.
Why is that? That’s because of my goal and my time frame. My investment goal is retirement. Therefore I have more than enough time in the market remaining. Time enough to recover from a crash.
I’m not going to do anything drastic when all the stock prices drop.
Does that mean I’m not ready? No, not at all. I’ve been holding on to more cash than I normally would. I’ve done so to be ready to buy when stock prices are low.
A crash will cause stock prices to drop, which is a great time to buy stocks at a discount. And who doesn’t like a fire sale? 😀
In my head I’ve run this scenario many times. Me and my mindset are ready for the next Black Monday. Whenever that will be.
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