Yes, Another Stock Market Crash Is Coming: How to Be Ready

If all you had to judge the state of the economy was the stock market, it would seem like everything is fine. After falling 34% in barely over a month in February and March, the SPDR S&P 500 ETF Trust (NYSEMKT:SPY) has surged 37%, and is down only about 5% since the beginning of the year.

This alone — such a disconnect between stocks and what is happening in the real world — has many investors convinced another market crash is inevitable. But is it? Absolutely. There’s no doubt we will see another stock market crash again. Let’s talk about how you can prepare.

The most important thing to know

We don’t know when the next market crash will happen. As much as it may feel like it’s inevitable, we simply don’t know. The past 10 weeks is an excellent example of how making a prediction on market crashes is nearly impossible.

Think about it this way: On March 23, 3.3 million people had newly filed for unemployment under lockdown efforts. At the time, 31,000 Americans had been diagnosed with COVID-19, and about 400 had died. On that date, the S&P 500 hit bottom, down about 34% from the high on Feb. 20.

SPY data by YCharts.

Fast-forward to today, and there are almost 1.8 million confirmed COVID-19 cases, more than 104,000 Americans have died, and millions more people are out of jobs as unemployment has skyrocketed to almost 15%. Yet the market is 37% higher than it was 10 weeks ago.

SPY data by YCharts.

It’s a reminder that in the short term, calling the top — or bottom — with stocks is pure luck.

The biggest mistake to avoid

Which brings us to the mistake to avoid: selling stocks to try and time your way around the next market crash. There are millions of people on the sidelines today who sold sometime in late March or early April, convinced things would get worse before they got better. Instead, they’ve missed out on the massive — inexplicable — stock market rally since the late-March bottom.

The trick with stocks is to remember there are no tricks. Stocks are ownership in businesses. Many are being hammered by the impact of COVID-19; some won’t survive. But the best businesses will come through this and return to growth as the world moves past this crisis. The hard part is riding out the downturns so you can profit from the return to normal.

Stocks are incredible long-term sources of wealth creation. This is true even if you buy at what seems like the worst possible time. For example, if you invested in an S&P 500 index fund like the SPDR S&P 500 ETF Trust in early October 2007, the next couple of years would have felt awful.

SPY data by YCharts.

But even for people who bought at the peak of the prior crash, stocks have delivered wonderful gains. Even from the pre-Great Recession peak to the bottom of the coronavirus crash this…