Is the Stock Market Going to Crash Again?

The market will crash again. That is inevitable. The only real question is when will it happen?

Let’s be clear: there are lots of reasons to believe the market could crash soon. Skyrocketing inflation , stretched valuations , and a critical labor shortage  each could pose risks to the market on their own. Put them all together in a situation like we have today, and the danger certainly seems to multiply.

Just because the market could crash soon doesn’t mean it will, however. If it somehow manages to keep climbing, would you really want to be sitting on the sidelines, watching the purchasing power of your money evaporate to inflation?

That combination of factors makes now one of the toughest times in most of our investing lifetimes to know what the best course of action should be. That might actually mean that there is no single best path forward and that the right approach could be to build a balance across the five options discussed here.

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No. 1: Get out of (expensive) debt

If the market’s massive run has left you in the position where you could pay off your debts, maybe that provides a good opportunity to actually do so. If not your entire debt burden, perhaps you could pay off everything but your fixed-rate, low interest mortgage?

It might seem crazy to pay off debt when interest rates are so low and the market has seen such huge recent rises, but that could very well be the best time to do so. After all, if interest rates rise, that could both increase your debt service costs and cause at least some of your stocks to drop, catching you with a double-whammy. When you add in the fact your debt service costs need to be paid even if your stocks are way down, you get a situation where reducing or eliminating debt looks like a smart move.

No. 2: Build a cash buffer

In a world where inflation is running over 6%,  having a lot of cash sitting around earning less than 1%  might seem crazy. When viewed only on that basis, it is. When you recognize that market crashes and job losses often go hand in hand, having a decent cash buffer can be viewed as an insurance policy. At least for a little while, it can keep you from being forced to sell at the low due to lost income and buy you time to find alternatives.

That said, with inflation running as hot as it is and cash returns failing to keep up, it might not be a good idea to hold too much cash. As a result, consider the standard guidance of three-to-six months’ worth of basic living expenses  as a reasonable “goldilocks” target.

No. 3: Plan for the big expenses coming your way soon

As a general rule, money you expect to spend within the next five years does not belong in stocks. If you have a big purchase coming up in that time window — say a new car, a child’s college education, or a bucket list vacation — a market sitting near all-time highs can give you a great opportunity to sell.

It’s OK to sell enough stock to cover the…