What to do if the Stock Market Crashes - Without Losing Money! *According to Statistics*

What's up you guys, it's Graham here. So one topic I've yet to cover on are the risks of investing. Pretty much if you do anything with your money, there's always going to be a little bit of risk with that. Like, even if you keep cash under your bed, you think it would be safe, right? Well, not really, because you end up losing one to three percent per year from inflation. Even if you have your money sitting in a savings account earning 1% interest, you still lose that to inflation every single year.

Even if you're investing in stocks or real estate, you could make an absurd amount of money, or you can lose an absurd amount of money. It's just really important to realize what the risks are, understand them, and then you can plan accordingly to minimize your losses if the market goes down. Here's how you can do that.

So long story short, if you expose any money to the market, you're exposing it to some risk, and that's 100% unavoidable. Now, this is especially true for anybody who started investing after 2009, because all you've seen so far is this crazy bull market where prices and things just continue to hit all-time highs year after year. This is the only market you've been exposed to so far, so there's definitely going to be a time, like now, where the markets just keek and hit all-time highs. And there's also times where the market is going to go down.

That leads to a really good question. The question is: if the markets are at all-time highs right now, is it a good idea to invest now, or should I wait until the markets crash and then I could invest? Statistically, it's shown that market timing rarely ever works consistently. It's almost impossible to predict when the market is going to crash and when the market is going to peak back up. It's really difficult to do consistently. You might get lucky here and there, but doing this consistently over and over again is pretty much impossible.

Now, hypothetically speaking, if you can do this, and if you can get it right consistently, great, more power to you. But the chances of doing this consistently and accurately rarely ever happen. Then it's also statistically shown that time in the market yields higher results than timing the market. Studies by Brad Barber and Terrance Odean actually found that individual investors experience lower returns in their actively traded accounts, with actively trading being the key reason for the lowered return.

Now, they actually examined 266,465 households between 1991 and 1996, and they found that the average household got a 16.4% annualized return. The thing is, even though they got a 16.4% return during those years, the market actually returned 17.9% during that same time period. Now, the funny thing is, the people who traded the most only got an 11.4% average return. They've also found that less than one percent of households were able to accurately predict market cycles between 1992 and 2006. That's it, less than one percent.

Now, I'm personally against timing the market because nobody really knows when the next crash is going to be. Like, even if you decide to sell right now when everything is at its all-time high, you could miss out on a few more years of just amazing gains every year while you pulled out of the market early. And even if you wait for the market crash, how do you know exactly when to buy back in? What if you buy back in and it continues to crash below what you bought in at?

There have been so many studies out there that show the more you tinker with your investments, the higher the chances are that you get a lower return than had you just stuck it out. Now, the thing is, it's almost impossible to accurately and consistently time the market time and time again to your benefit. Just as a fun example, I've included this really cool link in the description. Check this out. It's like this market timing simulator, and it really is difficult. Try this thing down below, click the link, try it out, and post your results down below. Let me know how you did because it's a mindfuck; like, it really opens your mind and sees just how difficult market timing is. Try this.

So now that we're on the subject of stock markets, and like all-time highs and investing, is it just better if you have money right now to invest it in one big lump sum, or is it better to do what's called dollar cost averaging, which is where you make smaller investments over time to average your initial investment? Or is it better to wait for the market to start going down and then you invest your money?

Thankfully, there have been so many studies done on this exact topic that show statistically which one is actually the best based on historic returns. The investment brokerage Charles Schwab ran the numbers from 1993 to 2012, and this is what they have found. So if you start with $2,000 available to start off every single calendar year and you invested it perfectly, I mean, like 10 out of 10, on the day perfectly, over 20 years, you're going to end up with $87,004.

So now the second scenario: you take that $2,000 and you invest it on the first calendar day of every single year as soon as you got that $2,000. Over twenty years, you're going to have $81,650. Now, in the third scenario, instead of taking your $2,000 and investing it at the very start of every single calendar year, you take it and you invest it in equal increments every single month. You're going to end up with $79,510.

Now in the fourth scenario, you just had some really bad timing. You're going to be left with $72,487. Now in the fifth scenario, if you just held your money in cash, you'll have $51,291. So this whole study just basically concludes the most reliable and profitable investment strategy is just to buy immediately and hold. Do not try to time the market.

So that then lends the question: how do you deal with the possibility of risk and the markets declining and you losing your money? My first piece of advice is do not invest money in risky markets that you'll need in the next two to five years. If you're saving up for a house down payment, or saving up for something where you're going to need that money, the best thing to do is just hold it in a high-interest savings account. Earn your 1% interest; you will not risk any of your money in the markets because two to five years is too short of a term to guarantee any sort of positive return. Doing this just completely mitigates all of your risk for any money you're going to need in the short term.

Now for all other investments, the best thing you can do is just have a long-term outlook. Do not go and start to panic sell if the market goes down and think you could outsmart everybody else by market timing and trying to get that right. Instead, it's a lot better to have a long-term outlook. Hold it long term; do not tinker with it because statistically speaking, that's going to yield you the best return. Just think of all of this as a very long-term ten to twenty-year plan.

What's also cool is that Charles Schwab also did research into this and found that between 1926 and 2011, a 20-year holding period never once produced a negative result. So if you decide tomorrow, "Hey, I'm going to take my life savings and invest it in the stock market," and then the day after you do that, the markets tank, the best course of action is to do nothing. Statistically, it's better you just leave your money there and continue investing as normal without panic selling and without touching it.

This is just for fun now that we're talking about market timing. Click that link in my description and just try it out; the whole stock market timing simulator, see how well you do and let me know, comment down below. Let me know how well you did.

So now let's talk about real estate. Like, what is the real estate market going to crash? Well, two things. The first is that I don't see any reason right now for the real estate market to crash. Anybody that's buying properties right now, if they're getting a loan, the loan process is extremely difficult, and chances are they're putting enough money down that they have so much equity in the house. You're not just going to let that go into foreclosure.

I'm also seeing really low interest rates, and while that's holding prices somewhat low, they're not stupid enough to raise interest rates from like 4.125% to like 7% overnight because they know that would screw things up a lot, so they're not going to do that. So there's no real reason that I see right now for the real estate market to crash. If anything, my whole prediction is that we're not going to see like these crazy five to twenty percent annualized returns in home prices every year. I think that's crazy, and that's totally unsustainable and unhealthy for the real estate market.

Instead, my whole prediction on real estate is that we're going to start to see a lot more development coming up, and we're seeing this pretty much everywhere. Chances are if you drive down any street, you see at least one home under construction or one home for sale. I think we're going to see a huge boom in construction that, if anything, is just going to alleviate home prices slightly. I don't see them dipping, but I don't see them shooting up either. I think we're going to be relatively stable while we see a lot more homes come on the market.

So for me personally, I don't see any reason the real estate market is going to crash or go down, pending some sort of, like maybe, a natural disaster or something that's entirely outside of our control. The second thing for me in terms of real estate is that I'm a huge proponent of rental properties. So for me, I really don't care what the value of the house is as long as the cash flows. As long as I get rents every single month, for me, that values a home just is somewhat arbitrary, and it's a cool number to think about, but it doesn't really benefit me that much because I care more about the rent than I do about the value of the house.

Also, what I found with the real estate market is that when it goes down, generally rentals do really well because nobody else is buying. I'm also a huge proponent in real estate—finding something that needs work, fixing it up, renovating it yourself—because when you're done with that, if you put in 100 grand, chances are you're going to build some equity into that, and that's going to be your buffer if the markets end up going down. The worst-case scenario is usually you just break even.

The best course of action for real estate is pretty much the same as stocks: just do nothing and hold it out. Just keep in mind and keep it in your perspective that anytime you invest, there's going to be some sort of risk involved, and that's 100% unavoidable. It's also nearly impossible to accurately and consistently time the market to work in your favor.

So long story short, the best thing you can do, statistically speaking, is just invest immediately, invest long-term, and wait it out as the market goes down. Just continue investing as normal, and this statistically speaking is going to yield you the highest return.

So as always, you guys, thank you so much for watching. I really hope you enjoyed this. If you haven't already, click that subscribe button. I'm doing my best to upload as much as I can. If you want to stay a part of that, click subscribe. Yes, click it, click it! Also, feel free to add me on Snapchat and Instagram. I post there pretty much daily, so if you want to be a part of it there, just add me on one of those too. Thank you again for watching, and until next time.

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