Stock Market Crash 2021 | When? And What Should You Do?

Then there are the traditional market indicators that get brought out all the time by economists the Shiller PE Ratio measures the average multiplier of the S&P 500 company's earnings to their valuation, and at the moment we're sitting at 36.9,  which is the highest it has ever been, except for the dot-com crash 20 years ago, but you could well say that there was a huge difference between now and the peaks in the last few crashes, because since the financial crash of 2008 we have lived through an unprecedented technology, and it's very easy to forget that.

The very first iPhone came out in late 2007, literally just before the crash happened, and since then we have had a huge rise in technology that has improved almost every single facet of our lives to an impossibly large degree, and we are now seeing a continuation of that ongoing... We have electric cars that are driving themselves coming down, a massive revolution in the way that we all work, and we're all moving to renewable energy… These are massive undertakings that are happening right now.

So naturally we have had a large number of companies spring up that have very large PE Ratios, because they are young technology companies that are not yet making large profits, so the multiplier of the value takes in future earnings rather than today's earnings.

15 years ago before the financial crash happened the biggest companies in the S&P 500  likes of: ExxonMobil, Citigroup, Walmart… There was one tech company in the top 10, it was Microsoft.

Today the top 5 companies in the S&P 500 are Apple, Microsoft, Amazon, Google, and Facebook, with Tesla before the share price fell. and unlike the Dot-com boom, this is not artificial inflation of websites where valuations are based purely on hype without any kind of real numbers backing them up. We're seeing a serious shift in power and a shift in how we all live our lives.

A similar time in our history was the late 1800s when the second industrial revolution

brought bicycles, cars, trains, modern ships, the telephone and electricity, so that was a massive transformation.

If you look at that same schiller chart (Shiller PE Ratio image) the peak in 1901 - 1902 then gradually reduced over time, and that wasn't because of a major crash it was because those early-stage companies that had the large multipliers, became more mature and naturally the multipliers decreased as well.

There's the Warren Buffett indicator, which indicates that the market is hugely overvalued when taking the total market capitalization of the US market and dividing it by GDP, except the tech boom that i talked about, breaks this pattern and breaks this indicator, and that's a really important thing to understand, because those big tech companies that i mentioned like Google, Apple and Microsoft, they operate globally and the valuation is based on their global reach not just on the US market.

The US economy is very big! the rest of the world combined is more than three times bigger, so when the Buffett Indicator divided by US GDP, so i don't think it makes any sense today, because that is not the market that those big US companies now serve.

So if we're genuinely comparing to the 1950s and the 1960s, when the majority of the big US companies almost exclusively cater to the US market, and we take today's valuation and divided by the global GDP instead, we get a number of 54.5%.

So perhaps the market is not as overvalued as it might seem but 90% growth per year will not keep going forever, and eventually the market will have to go down! Some say it can't happen soon, because we had a crash just 14 months ago, but we did see three major crashes in the 1930s!  and we saw other examples within two years of each other in the early 60s.

Most importantly with only about 100 years of real market history, we just haven't had enough time to know for sure, for example the bull run that we're seeing right now is also unprecedented, and most people would say it is impossible too.

The most common misconception with the market crashes is that people who are invested in the market will lose a lot of money when one of those happens! and here is why that generally isn't the case.

So the biggest market crash can lose as much as 40% to 50%, although a lot of them lose not quite as much but that loss is only from the very peak before the crash happens, down to the bottom just after it happens. If you look at just to the left of the peak and then you look just to the right of the bottom (image above), you'll usually see a massively different scenario where you'll probably only see about a 10% to 20% drop or even a sharp rebound after the crash as happened last year, and because investors will invest their money over a long period of time, it is almost impossible to go and invest all of it or at least a very large chunk right on the day when the peak happens, and then sell it right at the bottom unless you try extremely hard.

So anyone who invests in the market consistently over time will be investing in the run-up to that peak, and when they've been investing for some time that also means that they'll be investing at prices that will be lower than the bottom of the market after the market crashes, because of staying in the market for long enough, the same holds for continuing to invest after the crash happens. In fact shortly after the market crash takes hold is often one of the best times to invest in the market while everybody else panics, call it dollar cost averaging or whatever else you like. Buying shares at a huge discount because the market is running on emotion is where the money can really be made, some people panic and sell their stocks when they see the market dropping because they don't want the stock to fall even further and it wants to go and pull the money out hoping that they go and buy back in when it begins going back up!, but that is probably one of the worst things that you can do, because usually by the time that you pull the trigger the market has probably already lost a big bulk of its value, and if you then don't own the shares just after you reach the bottom you'll miss out on the biggest rises in the stock market which often happen as part of the rebound after the market crash.

Look at the days when the S&P 500 had the biggest ever percentage gains, you'll notice that all of the top 10 come immediately after big crashes in the 1930s the 2008 crash and the crash last year.

So if you are not invested on those best days you can go and miss out on 10 best days over a 20-year period, and then if you do that your returns will be 3 times less than if you just stayed in the market based on the J.P Morgan study (image above), and if you sell more often and miss out on more of the rebounds you will actually be losing money as the market continues growing.

One popular way of taking advantage of a big drop is keeping a massive load of cash waiting for it to happen, this is a strategy that people like Warren Buffett are known to favor and other investors and it is true, if the market goes down by 30% to 40% from a peak if you go and dump a load of your money into the market at that point you'll usually get really big results in the long term, because essentially you're giving yourself that 30% or 40% benefit over having invested that money just before the crash.

If you start holding your cash too early, you might find that you miss out on the growth of the stock and the stock market never actually falls to the level at which you could have invested.

So it's a game of roulette where you have to go and pick the point yourself if you choose to go and use that kind of strategy as to when you want to begin saving cash, and when you think it makes sense to invest that cash instead, if you held on to your cash waiting for the big crash in the early 1950s the mid-1980s or the early 90s, the market would actually never ever drop low enough, and you would lose out on 100% plus gains by trying to time the market.

The best thing to remember is if you're investing for the long term, if you're consistently investing your money over time, then every single market crash is followed at some point by a new record high, the problem is how long will it take to reach that record high?

Because we saw last year that can take just a few months and it can rebound incredibly quickly, but it could also take 14 years! as we saw after the dot-com boom, or it could take 30 years has happened in the 1930s, 40s and 50s.

As you can see there are actual strategies and actual ways of making money even during a market crash and remember that time in the market always beats timing the market.

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