The Next Stock Market Crash (How To Profit)

What's up you guys? It's Graham here. And just when you thought things were going well, everything gets okay. In all seriousness, we need to address a topic that not a lot of people want to think about, and that's the fact that at some point in the future, there's going to be another market crash.

After all, stock prices have already risen past their brand new record highs. Just 10 companies are responsible for almost all of those gains, and across nearly every single measure, the market is nearing the most expensive it's ever been in history. On top of that, we're already beginning to see warnings that the S&P 500 could fall as much as 50 to 70%. Some investors believe today's prices are beginning to mirror the extremes of 1929, and we're now at a point that investors need to consider that prices don't just go up indefinitely—forever—without a few bumps along the way.

So, given all the recent stock market euphoria, let's discuss exactly what's going on, the likelihood of another crash coming sometime soon, and then what you could do about it to plan ahead to make the best of the situation. Although before we go into that, I just want to say a quick thank you to the sponsor of today's video—the like button! Did you know that only 10% of the viewers actually go and smash it? Well, for the low cost of absolutely nothing, you too could help the YouTube algorithm. And subscribe if you haven't done that already. So thank you guys so much, and now let's begin!

All right, so to start, I've said this before, but in order to understand how to best prepare for a stock market downturn, we first have to cover the stock market crashes that have happened in the past. Because even though it's easy to think, "I don't want to lose all of my money," the truth is market collapses have never been completely catastrophic to the point where you're going to lose everything.

For example, the first one, most people think about when you hear market crash, is the year of 1929. Leading up to that, throughout the Roaring 1920s, money was practically pouring out of every crevice. Banks were lending money to anybody who asked, and people, for a lack of a better word, took that money and then speculated on stock prices because those prices just kept going higher.

However, once the market showed even a slight glimpse of vulnerability, people began cashing out, withdrawing their money from the banks for fear that the banks would be out of business. But banks didn't have enough cash to give back to all those customers, so one after one, they began shutting down. That led to the stock market dropping 83% over 2.8 years.

The stock market didn't fully recover until 25 years later. However, it wasn't exactly smooth sailing because after World War II in 1945, we saw another drop in the markets of almost 22% over 6 months, as veterans re-entered the workforce, began competing for a limited supply of jobs, and the economy had to readjust without all the government spending.

Then again, in the 1970s, we saw more turbulent times. Between January of 1973 and December of 1974, the stock market lost over 40% of its value. This occurred when the US dollar was removed from the gold standard, which led to runaway inflation. So, in order to combat that, strict policies were put in place to raise interest rates and keep the value of our money in check, which inadvertently caused everything else to come crashing down.

But after that, of course, we have the infamous Black Monday of 1987, when stocks dropped over 22% in a single day. Now, the exact cause of this is a bit unclear. Although, because there weren't any safeguards in place to prevent such an occurrence from happening, this mixture of factors led to a sequence of once-in-a-lifetime events that caused the single biggest day stock market drop ever.

Then we have the bubble of 2001, which was caused by a frenzy of speculation over internet-related companies, somewhat like we saw during the IPO boom of 2021, except with everything times 10. But that was unsustainable when those companies couldn't actually make any money, so they lost the vast majority of their value.

Sure enough, though, the market crashes continued. In 2009, we had the Great Recession. In this case, banks lent out way too much money to people who weren't qualified, who then went to purchase houses, and once they couldn't sustain those payments, they began defaulting. As a result, banks that held those loans began shutting down. People were losing their homes left and right. The entire stock market dropped over 50%. The Federal Reserve stepped in to bail them out, and then everything recovered quite well for the next decade, until the COVID crash from March through April of 2020.

We saw some of the single worst point-day drops ever in history, and from the peak, the S&P 500 dropped roughly 30% in value. But before the markets could drop too far, the Federal Reserve stepped in, lowered interest rates, put together a bailout, and within a month, the market began to recover. And finally, we have the most recent event, which would be the stock market crash of 2022. Why? Well, thanks to 0% interest rates, stimulus, tax breaks, and a lot of activity in the market, prices rallied basically from April of 2020 to December of 2021.

The S&P 500 increased over 100%. But once it became clear that inflation was getting out of control and that the Federal Reserve would have to step in, the market plummeted roughly 26% over the following 10 months. However, like every crash that came before us, that was only temporary, and again, we're back at all-time highs.

So, given how the average stock market drop is roughly 39% and lasts an average of 22 months, is this something that we have to worry about today? And how likely are we to see another crash like this in the future? Now, in terms of how often the stock market drops, that really just depends on how much it drops, and the severity of each drop is broken down as follows:

We first have what's known as a stock market correction, which is defined as a drop of at least 10%. Now, it's important to mention that normal volatility throughout the market is extremely common. In fact, since the 1920s, the S&P 500 has on average seen a 5% pullback three times a year. The market corrections are also fairly common, too. On average, a 10% correction happens every 16 months, and throughout the last 20 years, a 10% drop has happened 11 times.

And if you're like me and you like averages, the average drop has so far been 15.6% and lasts for 71.6 days. After that, though, we go on to the slightly more severe category, and that's a bear market, which is defined as a drop of at least 20%. According to the data, this typically occurs every 7 to 10 years, and when it hits, it tends to hit pretty hard.

During a bear market, the average drop tends to be around 33%, and it falls over a period of 363 days. Now, it's important to mention that with all of this, these are just averages, and that doesn't mean the next drop is going to be exactly 33%, or that the next drop has to last a year because most of the time they don't conform to the average.

For instance, back in March of 2020, we saw the fastest 30% drop ever in history since the Great Depression. So, anything could happen, especially if you don't expect it to. And finally, we have the last one to cover, and that would be a stock market collapse. I'd consider this to be a drop of at least 40% throughout the entire market, not just specific industries.

And throughout the last 120 years, it's only happened three times: once in 1929, once again in the 1970s, and again in 2009. So, an actual stock market collapse like this isn't exactly common, but it's not impossible to happen throughout our lifetimes. That's why once we understand the differences between these and how often they happen, we could come up with a plan to best take advantage of them and come out profitable.

So, here's how to start. In terms of why the market could drop, some analysts have some very choice words to say about where the market is trading because, historically, it is expensive. For example, the economist John Hussman makes the argument that non-financial stocks are trading at levels that we haven't seen since 1929 and 2001. Because of that, he believes that these levels indicate that the S&P 500 is likely to return around -5% annualized over the next 12 years.

He also points to a metric that I have never heard discussed before, and that's what's known as market internals. And yeah, that sounds confusing. He gives us an example: one, if enough speculators believe that stock market gains are driven by a tap-dancing squirrel monkey and that squirrel monkey begins to tap dance, stock prices go up—at least in the short term.

And two, because those stocks are ultimately valued in terms of their long-term cash flow, higher valuations mean lower long-term returns, which is the reason why no speculative episode in history has ever ended well. Or basically, investor psychology plays a large part in how the stock market actively trades, and when there's a divergence between reality and speculation, bad things tend to happen.

Of course, to give some credit to these claims, John Hussman did correctly predict that tech stocks back in 2001 would drop 83% before they literally fell 83%. He predicted the lost decade of stocks in the 2000s that wound up happening, and he predicted the 2008 Great Recession right before everything collapsed. Although, in fairness, I will say that his performance since then has been pretty terrible. His strategic growth fund is down 40% since 2000, his total return fund is up only 11% in the last 5 years, and a strategic allocation fund lost 4.5% over the last 5 years.

So, a broken clock could still very well be right twice a day. However, this time, John Hussman isn't alone in his thinking. The economist David Rosenberg believes there's truth to these claims that the stock market is poised to drop, saying that just like the clown at a circus who keeps blowing up the balloon, at some point, the balloon is going to pop. And I sort of look at the stock market right now as the clown of the circus blowing up the balloon.

His reasoning, though, is a lot easier to follow, as he explains that the S&P 500 is up 32% in the last 12 months while corporate profits rose just 4%. This means that the vast majority of those gains clearly can't be attributed to improvements in earnings results. Instead, the economy is simply going up for three main reasons: a better-than-feared economy, a significant jump in earnings estimates, and the expectation of lower rates—that's it.

This means that his bear case is an S&P 500 dropping to 3,200 or a 39% drop from today's levels, unless companies can dramatically increase their actual earnings. The legendary investor Jeremy Grantham also seconds him, saying that prolonged bull markets typically begin when unemployment is high, profit margins are depressed, and stock valuations are beaten down. Current conditions are the polar opposite of that, especially when the Shiller price-to-earnings ratio is within the top 1% of its historical range.

Of course, in terms of what you could actually do about all this, let's just make one thing clear: I'm not suggesting that a market crash like this is imminent or that one is going to happen anytime soon. Because for every bear case out there, there's just as equally a good bull case where stocks go even higher, like with Goldman Sachs’s recent example. For this reason, all we know for sure is that at some point in the future, the market's going to crash again, and how you prepare for that is going to make all the difference.

So, this is what you came for. First, always keep a 3 to 6-month emergency fund at all times. I know I sound like a broken record because I say this all the time in practically every single one of my videos, but it's true: having a 3 to 6-month emergency fund saved up in cash at all times is one of the easiest things that you could do to make it through a stock market drop. By doing this, you're going to be that much less likely to have to sell off your stocks in the event you lose your job, see a reduction in income, or something unforeseen just comes up at a time when everything's at a low.

Second, diversify your investments. For example, if you're 100% invested in Nvidia, Reddit, and Truth Social, there's a good chance you could lose a good chunk of money. Just like tech stocks dropped 78% during the tech bubble, there's a chance that could happen to you too if you're not properly invested across multiple sectors and across multiple companies. In other words, the more you spread out your money, the more you reduce your risk and decrease volatility.

And this is exactly what I've done. I've made sure to have a small amount of ownership throughout almost everything—from index funds to real estate to cash to treasuries to bitcoin. That way, should one of those markets fall, I have more than enough to make up for it with the others. And if everything drops, I still have cash on hand to be able to continue buying in.

Third, speaking of buying in, studies show that you should just keep buying in. Listen, I know it's gut-wrenching to watch your investments drop 10%, only to buy in thinking you're getting a great deal for it to drop another 10%. It keeps doing that until eventually you give up. But study after study shows that the best thing statistically that you could do is keep buying in long-term.

Even though a bear market could temporarily lose you an average of 33%, a bull market on the other hand is an average gain of 158%, and it lasts almost five times longer—it's 1,742 days. That's why sure, it's not exactly encouraging to lose one-third of your investment, but with every loss comes the opportunity for a much greater gain if you stick with it.

Oh, and by the way, if you want an easy way to do this, there are apps out there that'll literally do everything for you without you needing to think about it. For instance, I've partnered with Acorns, which has a feature where they could round up all of your purchases to the nearest dollar and then invest the difference on your behalf. So, if you spend $2.50 on French fries, that's 50 cents that automatically gets invested.

Something like this is also really helpful just to stay the course, stick with the plan, and keep investing long-term. I've personally been using them since 2018, and with regular contributions, I've now got almost $100,000 invested with them, and it's growing. This year alone, I'm up over $6,000 just because the market's done so well.

So, if you're interested in signing up, I was able to negotiate to get you a $20 bonus just for the month of April, which is way higher than the $5 they typically give you. Again, that's $20 for probably 3 minutes' worth of work when you go to acorns.com/graham or use the link down below in the description. Like, without exaggeration, I was on a call with them to bump this amount up as high as I could, and $20 is insane for just a few minutes of your time. Like, in less time than it takes you to watch this section of the video, you can make $20. Enjoy!

Anyway, speaking of all of this, that brings me to number four: Don't panic sell. Here's what I've noticed: the psychology that causes you to sell when your investment is dropping is usually the same mindset that causes you to buy in because it keeps going higher and you don't want to miss out. In fact, as an example of this, Peter Lynch's fund throughout the 1980s had an annualized return of 29%, but the average investor of that fund returned just 7%, which was even lower than market returns.

That's because the vast majority of people rushed in after it had already done well, and then they sold the moment it dropped in price, thereby eliminating most of the benefits of sticking with it long-term. On top of that, another aspect to consider is that over the last 20 years, a $10,000 investment in the S&P 500 would have turned into $64,000 if you just kept the money invested without touching it.

However, if you panic sell and miss just the best 10 trading days over 20 years, your return diminishes down to $29,000. If you miss the best 20 days, you'd lose out on $47,000 worth of profit. Missing the best 30 days means you've basically broken even over two decades, and if you miss the best 40 days, you'd flat-out lose money.

So by cashing out and then buying back in, you risk missing those best days that contribute to a significant portion of your overall return. But of course, assuming you could do that.

Number five, make sure to keep a steady income. In this case, the worst possible scenario is that you lose your job, you don't have an emergency fund, you have to sell off your investments to stay afloat, and you have to do all of that during a time when your investments have declined in value. This is why an emergency fund would hopefully be enough to hold you over until the market eventually recovers. But even if it doesn't, having a consistent income in place is going to help prevent you from having to sell off things when you don't absolutely have to.

And then finally, number six, keep some extra cash on hand if that makes you feel better. I'll admit, statistically, keeping cash on hand is not the most optimal for results. And usually, if you want the highest return, it's investing your money as soon as possible. But if you're worried about doing that, keeping more cash on hand is a way to sleep at night.

Oh, and also I just want to throw this in there as an honorary number seven: If you need the money in the short term, it's probably not a good idea to invest it in anything risky. The reality is a few years is not long enough to ensure that you're going to see a return on your money, and you could see a loss, which is not something you want to do for money that you know you need in the future.

This is why you should ideally view all of this as a 10 to 20-year plan, and if you're young, the longer the better. The reality is if you could do the above, you're practically guaranteed to make money over a 20-year time span, regardless of what the market does in the short term.

I say this so confidently because, throughout the entire history of the stock market, a 20-year holding period has never once produced a negative result. That literally means that you could buy in at the absolute peak—that the day before a catastrophic collapse—not do a single thing for the next two decades, and still wind up making money according to past results.

On top of that, what so many people don't realize or simply forget, especially if you're young, is that you're unlikely just to make one single investment, one time, and that's it forever. Instead, even though your initial investment might drop, realistically, you're going to be investing over a long period of time, and that'll dollar-cost average your overall portfolio. That's why if you see your investment drop and you decide not to buy in, you could very well be missing out on those best days in the market, and that's not good.

So, even though I've shared this message in the past, I feel like it's especially important to share again today because I'm seeing a lot more stock market euphoria, a lot of new investors beginning to enter the market, and a lot of people investing because prices are just continually going up. But, even though the market has so far done really well, just be conscious that as fast as it could go up, it could also go down.

And at the end of the day, at some point in the future, another stock market crash is going to be inevitable. It's going to happen tomorrow, next week, next month, next year—who knows? Maybe the market goes up another 100% before it drops 30%.

Anybody can make a prediction; who knows what's going to happen? But at least when you expect that it will happen at some point in the future and you prepare for it ahead of time by making sure you have the emergency fund, you're properly diversified, and you know what to expect, you could at least be better prepared not to make any mistakes.

Like not subscribing and hitting the like button if you haven't done that already. So, with that said, thank you so much. And as usual, if you want more information that I'm able to provide in a YouTube video, check out my newsletter down below in the description. I put all my details there and more, and if you want to be a part of it, like I said, it's totally free. Thank you so much! Enjoy the link down below, and until next time.