How to Prepare for a Market Crash

Market crashes are nearly impossible to accurately and reliably predict. In recent times, the headlines that the “AI Bubble” is going to be a repeat of the “Dotcom bubble” has surfaced more and more often.

On one hand, the old adage of “time in the market beats timing the market” has been proven again and again. In spite of all the concerning economic data, geopolitical tensions, and energy crisis that seems to be on the headlines every day, the S&P500 continues to reach new record highs every other month recently.

In the past decades, simply holding through and continuing to invest at regular intervals, especially for a broad market ETF like the S&P500, has yielded respectable returns.

On the other hand, buying the dip during a market crash can also provide strong returns that may beat simply holding through it all.

As usual with stock pickers, we are always trying our best to outperform the market. So the conundrum is:

• Do you stay fully invested at all times and allow your investments to compound regardless of market conditions?

• Or do you keep some spare cash* to buy the dip when the opportunity arises?

*Spare cash in this context means fully liquid funds that you can afford to invest. It does NOT include emergency funds.

Keeping cash on the side using liquid instruments like money market funds is one way to earn some yield on idle cash while waiting for opportunities.

However, you can take things a step further and employ a tail risk strategy in case you expect a market crash. A left tail risk strategy is basically hedging for unexpected and extreme events that may cause major loss or high market volatility, usually using options or volatility instruments.

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