Fears of a stock market crash are once again flooding the financial space. With inflation proving to be stubborn around 6.7% here in the UK and prices actually rising again in the US, predictions of a recession being just around the corner are once again hitting the media headlines.
It doesn’t help that October has proven to be yet another volatile month, spooking investors about imminent destruction. However, as worrying as the current outlook seems, there may not be a valid reason to panic.
Doomsday predictions are often proved wrong
One of the biggest names calling for a complete economic collapse is Jeremy Grantham. He’s a well-respected British investor who co-founded GMO – an investment management firm. Grantham was actively involved in launching the world’s first index fund. And correctly predicted the 2008 financial crisis, along with other market meltdowns over the course of his career.
Needless to say, that’s quite a resume with seemingly a lot of credibility. So, it’s no surprise that investors are now paying attention to his latest prediction of a stock market crash in 2024.
However, Grantham’s record isn’t as polished as it seems. In fact, he’s been persistently pessimistic for most of his career. Yet a 2019 study titled “Do Financial Gurus Produce Reliable Forecasts?” found that Grantham’s predictions only have a 42% accuracy. And a closer look at the performance of his GMO fund shows that he’s lagged behind the S&P 500 for over a decade.
Grantham isn’t the only one who made lots of doomsday predictions that never materialised. And there are plenty of other permabears with far lower levels of accuracy. But it goes to show that correctly predicting disasters in the past doesn’t guarantee perfect clairvoyance. And it’s entirely possible that his 2024 prediction is once again wrong.
Preparing for the worst-case scenario
Even a broken clock is right twice a day. So, let’s assume that catastrophe is indeed on the horizon. What are the best ways to prepare in the event of a stock market crash?
The most important step is to not panic. Even if disaster strikes, a portfolio of top-notch enterprises with strong balance sheets is more than likely capable of weathering the storm. Therefore, while downward volatility will undoubtedly be unpleasant, it’s not a reason to start selling at terrible prices.
Investors should also ensure their emergency fund is topped up. Having a cash cushion sitting in an interest-bearing savings account can be a massive relief. Depending on the severity of a recession, jobs may be lost along with the income they provide. And the worst position any investor can find themselves in is being forced to sell wonderful companies at awful prices just to pay the bills.
The bottom line
The stock will eventually crash. However, when this will happen is anyone’s best guess. It might indeed be next year. Or we may be at the start of a new decade-long bull market. Regardless, for long-term investors, the strategy remains unchanged. Buy high-quality enterprises at a fair price and wait patiently to let compounding do its thing.
