Stock market crashes – conclusions

The next stock market crash will inevitably come…

Stock market crashes, corrections or bear markets are inevitable and occur frequently. They have historically been triggered by a variety of different events and occurrences, and are unfortunately notoriously difficult to predict.

There are certainly many current market, economic and geopolitical risks to keep us watchful.

In an ideal world, a portfolio would contain many non-correlated assets but there are not enough of them, as the world’s equity markets and sub asset classes have a strong tendency to move in lockstep just when we need diversification the most.

However, as we saw in 2007 – 2009, the sub asset classes did not all fall the same amount or at the same rate and so can help diversify away from primary portfolio exposure.

There are early warning signs to monitor. Some or all of them have shown predictive power in the past.

Government bonds, gold, some quant based strategies and cash have proven to be good sources of diversification in turbulent times together with the Japanese Yen.

Certain equity sectors have also proven more defensive, particularly telecoms, utilities, healthcare, and consumer staples.

 

Definitions

  • crash – when the major stock indices fall 10% or more within a day or two
  • correction – when the major stock indices decline 10% over a week or more
  • bear market:     When the major stock indices fall 20% over two months or more

More on stock market crashes

This is part 4 of a 4 part series on stock market crashes.