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This is one question that haunts every investor: "Will the stock market crash?"
A stock market crash can happen at any time, so investors should always be prepared. There are proven strategies to protect your investments in the event of a stock market crash. And you can even make a profit during a market crash, too...
Today, we're examining past stock market crashes and will identify a key 2016 stock market crash trigger. Then, we'll tell you what you can do to survive, and profit, during a crash.
What History Can Tell Us About Stock Market Crashes
Looking at history can help us see the importance of protecting your investments before a stock market crash. Here, we'll examine two of the biggest crashes of the last century and what caused them.
This stock market crash was brought on by rampant speculation in the 1920s. When the speculative bubble burst in the fall of 1929, the Dow plunged 48%. It sank another 86% between early 1930 and the middle of 1932 and, by 1933, about half of all U.S. banks had closed their doors.
This crash kicked off a 10-year depression, with more than 30 million people left jobless. Stock prices eventually recovered, but it took more than two decades to reach pre-crash levels. Investors who weren't prepared lost everything.
More recently, the stock market crash of 2008 was catastrophic. On Sept. 29, the Dow dropped 777.68 points, the largest single-day loss in history. The second-largest drop in history? Two weeks later when the Dow dropped 18.1% the week of Oct. 15.
The impact on investors was huge. The net worth of U.S. households was $65.8 trillion in 2007. After the financial collapse of 2008, that number dropped to $49.4 trillion. The crisis wiped out $16.4 trillion overnight, over $2 trillion of which was retirement savings.
What caused the 2008 stock market crash? Another speculative bubble, this time in real estate. The rise of subprime mortgages and mortgage-backed securities created a housing bubble that burst towards the end of 2008.
The result was a lasting recession. In 2009 alone, housing prices had plunged 30% from their peak in 2006. Also in 2009, unemployment in the United States had doubled to 10%, with more than 15 million Americans out of work.
It's clear a stock market crash in 2016 could do major damage to your wealth. But how can you prepare for another financial collapse?
A Major Warning Sign for a 2016 Stock Market Crash
Like previous stock market crashes, one of the major triggers is speculation creating an overvalued market.
In August 2016, the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite each hit all-time highs on the same day. On top of this, we are in the midst of one of the longest bull markets in U.S. history.
What's fueling these soaring stock prices?
It isn't economic growth. In Q2 this year, GDP growth was only 1.2% compared to a median growth rate of 5% over the past 20 years. Corporate earnings are also flat.
The source of this bull market has been cheap money thanks to the Fed. The Fed's low interest rates have pushed investors into buying stocks because they can't get consistent returns elsewhere. This has driven stock prices to potentially unsustainable levels. In addition, FactSet reports that corporations are using the cheap Fed rates to finance share buybacks to boost their stock prices.
Money Morning Global Credit Strategist Michael Lewitt expects this overvaluation of the stock market to end. When it does, he expects investors fleeing stocks to "resemble 10 pounds of baloney trying to squeeze into a five-pound bag."
Savvy investors will protect their money when this bubble bursts, but they can profit. too. Money Morning has a plan for how to do both...
How to Profit from a Stock Market Crash
While a stock market crash can be devastating, you shouldn't bail on your stocks. The stock market has recovered after every major crash.
Even after the stock market crash of 2008, the Dow gained nearly 60% from early March 2009 through the end of the year. If you sell all of your stocks, you can miss the recovery. In the end, missing the recovery is much worse than being a part of the crash.
But if you want to protect yourself from the crash, and even profit, there are some key investments you need to have.
If you believe that the stock market is about to tank, Money Morning Capital Wave Strategist Shah Gilani recommends buying into ProShares Short S&P 500 ETF (NYSE Arca: SH). This is a reverse ETF that shorts the S&P 500. If the market goes down, your profits go up.
You can also invest in more traditional stocks. Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends looking for stocks in businesses with strong earnings in "unstoppable trend" industries. In other words, these are companies that are going to do well no matter what is happening with the markets.
Fitz-Gerald recommends defense giant Raytheon Co. (NYSE: RTN), the U.S.-based disposable medical company Becton, Dickinson and Co. (NYSE: BDX), and profitable utility company American Water Works Co. Inc. (NYSE: AWK). These are in key industries that will always have demand.
However, Lewitt says the best defense against a stock market crash is owning gold. Lewitt recommends holding 10% to 20% of your investments in gold as a safeguard against a crash.
You can buy physical gold, but that means you have to have a way to keep it safe. A better option might be gold ETFs, like SPDR Gold Shares (NYSE Arca: GLD), which can give you all the benefits of gold without the cost of securing it.
Want to Know More About Buying Gold? Check Out Our Essential Guide to Buying Gold & Silver