The stock market's looking a little shaky these days. Some analysts are saying it is overpriced. Perhaps you are nervous about your own investments – wondering whether the stock market is due for another correction.
There are plenty of predictions regarding the future of stock prices. Truth is, nobody knows for sure how the market will behave in the near term. The important thing that we as investors need to focus on is being prepared for whatever happens, whenever it happens. Our own preparedness is all we can control. History says there is a 100% likelihood of a market crash eventually. So if you want to be in stocks, it is necessary to plan both mentally and financially for the next big meltdown.
Here's a little trick I use to gauge my own readiness. I imagine the stock market shutting its doors, and remaining closed for five years. Whatever stocks or stock mutual funds I own would be figuratively locked up, meaning I would not be able to cash out until after the five years are up. Try this thought exercise for yourself. How would such a scenario affect you? Would your lifestyle suffer?
Of course, this is a purely hypothetical situation, as the stock market does not actually close its doors for such a long period of time. On the other hand, the psychological effect of a 30-50% drop in stock prices is no different. We have had many such bear markets in the past, and I have experienced some of them myself.
Yes, the stock market does eventually come back up, but it takes time, sometimes several years. Mentally, I like to prepare for at least five years of dire market conditions – you can go longer if you are especially risk averse. What you are trying to do is ensure that you never are forced to sell your stocks at fire-sale prices.
Don't wait to ready yourself for the next market crash. Convince yourself today that your stocks could be locked up for five years. Through smart preparation, you will improve your chances of reaping the long-term rewards that stocks offer.