Why the stock market crash is a natural process
Watching the events in the financial world, more and more experts predict the crash of the US stock market. Huge money is spinning here, and the segment itself is actively growing for a long time, which may eventually lead to collapse. The crisis will also affect the markets of other countries.
Despite the disappointing arguments, analysts do not advise to panic. Falls in the stock market have occurred before. It is worth remembering the mortgage crisis that took place in 2008 or the crash of dotcoms in 2000, the crash in 1987. In 1923, the market experienced a drop of 83%, which is considered the largest in history. For comparison, in 2008, the exchange subsided by 50% and in 2000 by 44%.
The stock market is characterized by rising or bullish and falling or bearish phases. Since 2009, there has been a bullish period, which is practically unchanged. It is the second in duration and the 4th in profitability level in the history of the stock market. The longest phase has been observed for 15 years. One of the main P/E ratios on the US stock exchange reached the value of 24, before that its maximum was 16. Schiller’s P/E ratio is 29, which is quite a lot, especially considering that the same figure was before the Great Depression.
When analyzing the possible risk of a stock market crash it is necessary to pay attention to the indicator of Warren Buffet, which has 131% that is quite a lot.
At first glance, such values are alarming, but if you look deeper, it becomes clear that the current processes are integral to this segment.
Landslides have always been and will always be, so it is very likely that an investor who works with long-term projects will face a crisis period or minor corrections on the stock exchange. The stock market can not exist without the phases of ups and downs, which replace each other, these are the principles of economic cycles. After collapses, the market is always recovering, strengthening and getting better.
But there are exceptions to the rules. The Japanese market has experienced a major collapse and has not yet reached the 1990 level. The reason for this collapse was the bubble effect, which was too inflated and could not withstand the pressure.
It is possible to reduce the damage caused by the collapse of the stock market by observing a number of rules. The first thing that experts advise to do is to create a personal reserve fund, the volume of which should be sufficient for at least 6 months of life without income. It is better to keep it as a bank deposit. This money will help to survive in a difficult period and get rid of the need to sell assets.
It is important to review the investment portfolio for both stocks and bonds that are more stable. It should also contain assets from different classes and countries.
