Thirty years ago, on Black Monday, October 19, 1987, the Dow Jones Industrial Average stock index fell 508 points, or 22.6% – still the largest single-day percentage drop in stock market history.
If a 22.6% crash were to happen today, the Dow would move lower by more than 5,000 points. Imagine the stress that investors would feel after such an event.
Will we have another such market drop? And when? Unfortunately, neither I nor anyone else has answers to such questions. But it could happen. It definitely could happen. The question is, am I ready? Are you ready?
The way I believe one can prepare is firstly to own stocks of high quality companies. You want to own good businesses, because good businesses will survive and grow in all kinds of market conditions. Good companies are not immune from stock market crashes (they will probably crash with the rest of the market), but the stability of their underlying businesses will provide support for the price of their stocks.
Secondly, you want to own shares when they are attractively-priced. The time to get out of stocks is when they become overpriced relative to value. This isn’t market timing – just a rational decision based on the two factors that matter most to investors: price and value.
Finally, you should ensure that you are only investing long-term money. You never want to be forced to sell in the short-term. Lots of investors fail to heed this warning, and eventually pay a dear price.
Records are made to be broken. Owning high quality companies, whose shares are attractively priced, and investing only long-term money, are the keys to being prepared for the next record-breaking stock drop. Don’t wait. Be prepared today.