Unless you have been living on a desert island, you would know that we are confronted with the doom and gloom messages of an impending stock market crash almost every day.
I typed in the words ‘stock market’ in a YouTube search and the first five videos were all about impending doom. Yet none of these videos were aimed at helping the viewer understand what to do in the event the stock market does pull back or crash.
The other big issue that the world seems to be focused on is AI, with many asking questions or looking for solutions from ChatGPT. I did what I suspect many are already doing, which is to ask Chat GPT to write a blog post on the three things I could do to avoid a stock market crash.
The output was seriously alarming, as none of what it suggested was good information or advice on how to manage or avoid a crash.
The three things ChatGPT suggested
Firstly, it advised me to diversify my portfolio and shared the old adage of don't put all your eggs in one basket.
If the stock market crashes, no amount of diversification is going to help you unless you move your money to cash or real estate before the crash starts. Unfortunately, this is not how investors think, particularly as the stock market is generally overly bullish before a crash starts and investors are loath to exit as they are making good returns.
It then advised me to regularly rebalance my portfolio to avoid over-exposure to one asset, but this only increases your costs and risk. I am against rebalancing in a bull market but to suggest you do it in a bear market or a crash left me a little perplexed.
Lastly, and possibly the best bit of advice was to adopt a long-term perspective but it also included a tip to dollar cost average, which in a stock market crash is the worst thing you can do for your portfolio.
No one knows when a crash will occur with a high degree of accuracy. Given this, it pays to be a Boy Scout and get prepared, as it will allow you to manage your stocks in the event the market does fall heavily.
No one seems worried when the stock market is rising but irrespective of the direction of the market, it’s important to always have an exit strategy in the event your stocks fall. This is very simple to implement using a stop loss as it minimises your downside risk.
While it is inevitable that the stock market will crash again, we don’t know when this will occur. If you’re concerned right now, that means you need to plan because if something does happen, you know exactly what to do and how to react.
Dale Gillham is chief analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award-winning book Accelerate Your Wealth - It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au