As a result, there's a balancing act you must manage with that more conservative money. The trade-off you face is that money in more conservative investments like bonds, CDs, or cash will probably earn lower returns over the long haul than money in more aggressive investments like stocks. If you expect a pension, Social Security, a salary, or some other fairly reliable source of cash to cover some or all of your costs, you don't need that five-year buffer for the expenses those things will handle. That doesn't mean five years of your total living expenses - unless you really plan to cover 100% of your expenses from your portfolio. It also means you'll want around five years of the expenses that you expect your portfolio to have to pay for to be held in safer investments than stocks. That means you'll want a three- to six-month emergency fund to cover your costs temporarily if your other sources of income unexpectedly dry up. What can you do about a market that will crash at some point?īecause you can be pretty sure the market will crash but can't be sure when it will happen, you should set up your finances in a way that you don't need to rely on stocks to cover your near-term costs. In essence, with a decent strategy, you can set yourself up to take advantage of long-term growth while still protecting yourself from the short-term pain that crashes bring with them. By planning around that distinction between whether and when a crash will happen, you can find a balance point that works in most market conditions. That could take away a big chunk of the money you're trying to protect in the first place.Įven if predicting when the market will crash again is a very difficult thing to do, recognizing that it will crash at some point still provides a very valuable investing framework. Even if you guess right, you'll still likely be exposed to a major tax bill.
If you guess wrong and the market keeps climbing, you'll be missing out on serious gains. That makes forecasting when the next market crash will happen good for generating clicks, but not so good when it comes to trying to make changes to your portfolio just before that crash happens. The buying and selling of stocks is what drives market moves - and the emotions of the day can rule over long-term fundamentals for quite some time. Image source: Getty Images The tougher question - when will the market crash again?Īlthough it wasn't exactly hard to predict that 2022 could turn into a challenging year in the market, a key reason the stock market opens most weekdays is that nobody really knows what will happen.
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