Diversification of portfolio is the best defense. That implies having sufficient money and securities in your portfolio to cover all predictable costs for a long time. That means trading off the low income generated by those assets against having to sell off stocks eroded by a correction.
Save at least 20% of your pay. Note that reserve funds is troublesome because of wages stagnation, expansion, pay imbalance and increasing expenses of medical services and schooling.
Look for the sign when the market is about to crash
Investors are only happy when the companies they invest in are seeing growing profitability. If profits stop growing, it raises questions about the company’s ability to continue growth ahead, leading many investors to abandon ship and driving stock prices down.
During times of economic uncertainty, when consumer confidence is lacking the most, consumer spending often dries up, leading to plateaus in profitability for many businesses and widespread stock sell-offs.
As in the last week of February 2022, corporate profits remain on the rise. A mix of relaxed and favourable taxation policy announced in the budget and stimulus provided and corporations and investors are reaping the rewards.
According to Buffett himself, the market is valued fairly when the indicator is somewhere between 75% and 90%. Once the indicator climbs to between 90% and 115%, the market is modestly overvalued. Finally, any time the indicator is over 115%, the market is highly overvalued and poised for significant declines.
Fear and Greed Index
-by CNN Money
When the market gets too euphoric and overvaluations are rampant, it’s a sign that a crash is imminent. One of the best ways to guage this is by using the Fear & Greed index.
This index was designed to gauge whether investors are too bullish or too bearish based on the two primary emotions that drive the market.
Political uncertainty is a common concern prior to market crashes. After all, when investors don’t know what to expect, they’re not willing to risk their money, leading to less investor interest and declines in market values.
Geopolitical uncertainty between India-Pakistan also relations with China will contribute to stock market sentiments. For some time tension may continue as China, Russia, and Iran vie for power and many western countries face internal political turmoil.
Inverted Yield Curve
An inverted yield curve takes place when long-term coupon rates on bonds (Treasury Bills and Treasury bonds) fall below short-term rates. The term inverted is used to describe this action because long-term fixed-income investments usually pay a higher return than their short-term counterparts.
When the curve is inverted, it suggests that investors believe economic struggles are ahead and that rates will fall in the long run. Historically, this has been a compelling signal of coming crashes. In fact, over the past 50 years, an inverted curve took place just before each recession, with only one inverted curve happening but not being followed by a recession.
Home & Vehicle sales Decline
Consumers aren’t as cavalier about buying a home if they don’t feel comfortable with the state of the economy.
By looking at growth in vehicle sales, you’ll get a gauge of how consumers feel about economic conditions and their confidence in making big-ticket purchases. This is important because consumer feelings toward the state of the economy often dictate their spending and saving habits, which boil down to either revenue growth or declines for many businesses.