How to Prepare for the Coming Stock Market Crash

Question


Hi Barefoot,

My husband and I are two to three years from retirement. Someone told him there will be a financial downturn this year in Australia and our superannuation will be hard hit. Should we move our super somewhere safer?

Clara

Scott's Answer


Hi Clara,

It sounds like your husband has been hanging out with a tarot card reader (or an economist).

(For my money, tea-leaf readers have slightly more accurate stock market forecasts, and a much better wardrobe.)

Okay, enough of the jokes!

The truth is that when you hit 60, you’re going to stress about money.

It’s unavoidable. Seriously, everyone over 60 I know stresses about the stock market.

So let’s talk about how to prepare for it:

The first risk you’ll face is that a stock market crash happening just before, or shortly after, you retire.

(My old finance professor called this ‘sequencing risk’ — which is a fancy way of saying that a market crash in the years leading up to your retirement will have a significant impact on the future income you can generate from your nest-egg).

The second risk is that you’ll freak the hell out, sell at the bottom of the market, and go to the ‘safety’ of cash.

The third and final risk is that you’ll leave that money in cash, and get robbed by rising prices (inflation).

The best way to reduce all three risks is by doing the following:

If you’re over 60, start aggressively building up three to five years of ‘Retirement Mojo’ — a cash buffer of living expenses. (If you think you’ll get a pension or part-pension, that’ll reduce the amount you’ll need to save to reach your buffer.)

Better yet, put it on autopilot — contact your ultra-low-cost super fund and request that all future super contributions go to a cash and fixed-interest investment option. However, you should keep the rest of your nest egg in growth assets (within your super fund) to keep your nest egg ahead of inflation.

That way, when the next crash does come — and it will — you’ll be able to say to yourself: “That’s Day 1 — it’s a good thing I have 1,095 days (three years) of living expenses set aside to ride this sucker out.”

Scott