How I’m Protecting My Investments From the Stock Market Crash

[00:00:00] Speaker 1: I've been investing for about 15 years now and I've built up multiple six-figure investing accounts including some that I share here on YouTube. At the moment there's probably more talk than ever about some kind of stock market crash. Whether it's from the AI bubble, private credit or the global bond markets, we're constantly being told that the stock market is priced too high. So this got me thinking, why don't I show you exactly how I'm going to protect myself from the crash? I'll let you know exactly what I'm doing, explain why I'm doing it and hopefully leave you in a better position to be able to be ready with your own investments. Whether you've been investing for years or just about to get started, I think this will help you get prepared. So here's how I'm doing it. Okay, this first step is probably one of the most important ones and I think it applies to everyone no matter who you are. You need to choose the right investments but not only that, you need to choose the right investments for you. That's really key is if you choose the wrong investments and the stock market goes through a crash for a few years, you could end up in a very bad place. Here's how I think about it all. When I choose what to invest in, I'm always asking myself the question, what's the risk here? And also, what are the chances that I could lose everything as well? For example, I know that buying shares in a company is riskier than buying government bonds. I also know that buying shares in smaller companies is generally riskier than buying shares in big companies. Those small companies are far more likely to struggle if we go through a multi-year recession. And finally, I also know one really important thing and that is absolutely key to all of this. I know that most investors, professional ones and people like you and me fail to pick the right shares to buy and end up underperforming the average of the whole market. I also know that the vast majority of all individual companies that we can buy shares of won't provide very good returns. In fact, if you look at past research, you'll see that only a tiny percentage of all companies have delivered almost all of the returns that we see today. So this leads me to a really important lesson I practice every time I invest. I make sure that I invest in lots of different things. That way, I know that in the event of the stock market going down, I can reduce the level of risk that I take on. This is just called diversification and it just means investing in lots of different things rather than just one or two things. Now, the simplest way to get a good level of diversification in your investments is by using something like an index fund or even a mixed asset fund. Inside of these funds, you can invest in hundreds or even thousands of companies and you can also add in things like bonds as well, depending on what the right investments are for you. The simplest way to explain this is by saying that if you invest into a broad market index fund, you protect yourself in the event of companies going bust or entire industry struggling during a recession. It doesn't mean you can't lose money, nor does it mean your investments can't go down in value, but it does mean that you can reduce your level of risk and find what's right for you. If you can get this right, then you're far more likely to survive a stock market crash because you won't be one of those people who bought the wrong investment and watched it go to zero. Again, diversification isn't a way to guarantee making money. Investments can rise and fall and they do every single day, but they can reduce your level of risk. One of my favorite quotes about this topic says that diversification is the only free lunch with investing. Remember that the next time that you invest your money. Now, with an index fund, let's just use a global one as a quick example. We might have one with 5,000 companies inside of it. Even if 100 of those companies go out of business, that's just 2% of companies inside the fund. What generally happens here is that another 100 companies will fill those spaces and the fund continues on. Now, for me, the vast majority of all of my investments are inside index funds and I sleep very well at night knowing that in the event of a stock market crash, I've got the diversification I need to get me through that crash. Now, I've not even mentioned investments like bonds here as well, but these could be another way to help you get through any future stock market crashes. They'll generally have lower returns, but they also carry far less risk as well. You might have seen that in the news recently, there's been loads of talk about bond yields and how they're really high at the moment, which could be great if you're a saver or investor into those things. Anyway, if you want to go into any more detail on index funds and investing more generally, remember that I've got a complete beginner's guide to investing that you can go and watch after this one on my channel. The main point here, though, is that with the right investment choice for you, you'll give yourself a better chance of getting through a crash. Getting it wrong puts you back square one. Okay, point two I wanted to cover was this one. I think all of us need to be ready for a stock market crash at all times, not just in the way we invest, but also prepared mentally too. I know from having invested for many years and making hundreds of videos about investing just how important it is to learn from the past. I think if you understand your market history, you can better prepare for the future and here's why. Stock market crashes have happened on average every 12 years and this is when the market falls by 30% or more. Bear markets happen every five to seven years. These are defined as falls of more than 20% and then corrections happen every three years, generally defined as when the market falls more than 10%. Now, first off, it's important to say that the time between these events is misleading and in no way can predict what can happen in the future. The most important lesson from this information is just to know that these things happen and they are part of the market. If you understand that when you get into investing, you'll be much more prepared when they do happen to you. It's like reminding yourself that if you go out and drive in your car, you should expect that at some point you will get a puncture. In 2014, Michelin estimated that punctures happen every 75,000 kilometers on average, which is about 46,600 miles. But although this is an interesting stat, it doesn't tell us about what the future holds on our next car journey. It's a good reminder that they happen often enough that we need to be prepared for them, but saying that you've driven 46,500 miles means that you're about to get a puncture in the next 100 miles is not useful at all. This is exactly the same with the stock market. Crashes and corrections could come close to each other or they could take decades to play out. We just need to know that these risks exist, but we shouldn't try to use the past data to predict when they might happen next. Just think about it like this. If the stock market never had any crashes or corrections, then it wouldn't give us the potential future rewards as there would be far less risk. The reason we can enjoy long-term potential rewards is that investing carries a lot of risk. There's no two ways about it. If you want to enjoy the potential future rewards that come with being an investor, you need to mentally prepare for everything that could happen. I've found that just accepting this fact as the price of entry to the stock market is a much better mindset than pretending that it's not going to happen to you because you're somehow special. So get your head right, learn from the past so you're ready no matter what happens. Also, it ties really nicely with the first point. If you get the right investments for you and you understand what you're investing for and why you're doing it, you're far more likely to stick with it even during very bad times. Your job as an investor, in my view at least, is to protect your portfolio, not just from the market, but from yourself. As Benjamin Graham said, Warren Buffett's mentor and friend, the investor's chief problem and even his worst enemy is likely to be himself. Now, when I say have cash ready, I am not suggesting that you hold cash ready to buy into the market during a crash. Doing this is market timing and that is not something that is likely going to end well. If anyone could reliably predict the lows of the market and buy in, then sell at the top every time they would be the richest person on earth. Don't fall into that trap thinking that's easy. When I say have cash ready, I'm talking about a really basic personal finance step that says you should have an emergency fund with enough cash that you can easily access to cover life's expenses. Some people say anything between three and six months of living expenses, but really it's a number that's completely personal to you. Now, the reason that it's so important is that you have to imagine this scenario. Let's say that we go into some kind of recession. The stock markets are falling, but not only that, you lose your job as well. And for good measure, your boiler breaks down and your car needs four new tires as well. Thank you very much, Michelin. During this time, you need a way to be able to pay for all of these expenses without an income. Otherwise, here's what will probably end up happening. You'll end up dipping into your investments, maybe into your stocks and shares, AISA, and selling off all of that pot that took you ages to build up. What's even worse is that this usually happens at a really bad time when the markets are at a low price. You could end up undoing years of great work by not being prepared with an emergency fund should the worst happen. I always remember this quote by the late great Charlie Munger when I think about this point. He said that the first rule of compounding is that you should never interrupt it unnecessarily. So I know this point might be a simple one for a lot of you out there, but I bet there are lots of people who have completely skipped this one because we've had such a good run in the stock markets recently. If a stock market crash were to happen anytime soon, the people likely to do the best out of them will be those who aren't forced to sell out. It's as simple as that. And it's one of the only things that you can control when it comes to investing. Next up, I think all good investors need to have a plan. It doesn't have to be some really detailed document or anything fancy, but you do need to know why you're investing and what you're doing it for. Now, for me, I know that I want to invest my money for the long term to achieve some kind of financial freedom. I want to get to a place where I can decide what to do with my time and have enough invested where I could choose exactly how I spend my days. Whether that means that I choose to make a YouTube video one day or just go and play paddle and get a really bad tennis elbow, any suggestions to get rid of that will be much appreciated. Anyway, I know that in my plan, I'm going to have to invest for a long time, super consistently to give myself any chance of success. I also know that the longer I invest, the more likely I'm going to have to experience multiple stock market crashes, corrections and everything in between, like I mentioned earlier in the video. So knowing this all to be true and knowing that my plan is to achieve financial freedom, I'll use this to help me get through any stock market crashes and really difficult times in the markets. Don't just take my word for this, though. There's some fascinating research in psychology showing that people who plan in advance how they'll respond to difficult situations are far more likely to follow through with their goals. It's called implementation intention. Now, rather than saying, I'm going to invest for the next 20 years, you go one step further and say, if the stock market falls by 40%, this is what I'm going to do. So by having this all sorted in advance, you put yourself in a much better position However, I'm not going to pretend this is somehow easy to do. And I've made plenty of mistakes in the past myself. But I can definitely say that now that I have a much clearer idea of what I want, I'm in a much better position. I will say that there's only so much planning you can do to prepare yourself for when things get really bad. I am also reminded by the quote from Mike Tyson when he said that everyone has a plan until they get punched in the mouth. But even saying that I'd still rather at least have a plan than not have one. Tie this with the first few steps. And I think you could be a much better investor than the vast majority of people out there who really don't know what they're doing. On this last point, I wanted to talk about a couple of really important key things that we can control as investors, no matter what's going on out there. These are all things I'm doing that will help me get through any kind of stock market crash. Firstly, I invest every single month without fail, both into my stocks and shares ISA and my pension. I don't look at prices. I don't look at interest rates. And I definitely don't look at stories in the news. I invest every single month with money that I can afford to invest, which does not take anything else away from my life right now. So on that first point, because I invest every single month, this means that when I buy into the stock market, I get the long term average price. Sometimes that price might be at the top. Sometimes it might be right at the bottom of a dip. And other times it might be just somewhere in between. So in the long term, all I want to get is the average price, which I would expect to give me a good chance of making great returns. If there was any way at all to be able to time the market and save money up and buy a guaranteed dip at the bottom of the market, everyone would do it. Just remember that before you ever get tempted to hold back investing for whatever reason you make up, I still get comments all the time from people who are absolutely convinced that they should hold cash ready for a dip. And they just know when to put it back in. Don't be one of those people if you can avoid it. Secondly, on the other point I mentioned, I invest into accounts which are extremely tax efficient. The ISA allows me to keep all of my gains tax free. And then the SIPP pension, private pension basically, allows me to get tax relief on anything I invest for my future. It also grows tax free as well, so there's nothing new I have to worry about no matter what the market is doing. On that point, I also make sure to keep my investing costs low as well. If you ever want to look at the platforms I use and check out some of the best deals for new customers, I do have a Stockton Shares ISA comparison sheet that you can get access to. The link is at the top in the description for you. Also might be on screen as well. Just pop in your email and I'll send it over. If you keep your investing costs low, it means that more money stays in your pocket and can grow over the long term. As the late great John Bogle said of Vanguard, with investing you get what you don't pay for. So I try to keep my costs as low as possible. Fees are one of the only things we can control. So it makes sense to try and keep them as low as possible, whether we have a crash next year or next week. Now, what you might have noticed with all of these points is that they have nothing to do with the stock market itself. None of my plans depend on a certain stock market price or any kind of indicator that you might like to pick. And I think this part is the most important point I can make. Nothing in the stock market is in your control. You can't control interest rates. You can't control inflation. And you certainly can't stop countries from fighting each other. So in my opinion, at least, I think it's really foolish to change the way you invest based on things that you can't control. I'd much rather focus on the things that I can do that I've discussed in this video. I invest what I can afford to do. I invest every month. I stay well diversified and I keep my costs as low as possible. Add on top of this being a long term investor and you give yourself the best possible chances to earn good returns. If you are the kind of person who's going to sell out every time the market looks scary or stop investing because you read a news headline, I can tell you that you'll probably never invest ever again. There's always uncertainty out there and there's always risk. So all you can do is make sure you find a way that lets you invest whether the market is shooting upwards or coming sharply down. Only you can choose what that looks like and what your investment should be. But I hope this video can help in some way at least. Let me know if you've got any questions in the comments. I'm looking forward to those special individuals who will comment things like sell everything now and just buy gold or even those people who are convinced a crash is coming. I'll be ready to hand out the chocolate medals for you guys. See you in the next video. Happy investing.