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    Home»Investments»Is a stock market crash looming? Here’s what I’m doing to prepare
    Investments

    Is a stock market crash looming? Here’s what I’m doing to prepare

    February 19, 20254 Mins Read


    Katie Brockman
     |  The Motley Fool

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    How to start investing: Everything you need to know

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    While the stock market is still surging right now, investor sentiment may be taking a turn. Around 34% of U.S. investors feel “bearish” about the next six months, according to a weekly survey from the American Association of Individual Investors released in late January. That’s up from around 29% the week prior.

    While nobody can predict what the market will do, especially in the short term, some metrics suggest that a downturn could be on the horizon.

    The Buffett Indicator, for example, suggests that a slump could be ahead. This indicator, made famous by Warren Buffett, measures the ratio of the total market capitalization of all publicly traded companies to U.S. gross domestic product (GDP). In 1999, Buffett used this indicator to predict that the market would soon face a steep downturn — a prediction that came true just a year later when the dot-com bubble burst.

    “If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you,” he explained in an essay published in 2001. “If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire.”

    As of February 2025, the Buffett Indicator has reached 203.51%. While this metric alone doesn’t necessarily mean that a crash is coming, it could be wise to start taking precautions just in case. To protect my personal portfolio, there are three things I’m doing right now.

    1. I’m stocking up my emergency fund

    If stock prices fall, your portfolio could lose substantial value in the short term. As long as you stay invested, though, you likely won’t lose any money. The market will eventually rebound, and your portfolio should regain any value it lost.

    However, if you pull your money out of the market after stock prices have dropped, you could end up selling your investments for far less than you paid for them — potentially locking in steep losses. If you don’t have an emergency fund and you face an unexpected expense during a market slump, it’s more likely you’ll need to tap your investments at a less-than-ideal time.

    2. I’m combing through every investment in my portfolio

    The best way to ensure your portfolio pulls through the next bear market is to double-check that every stock you own is still a solid investment. Companies can change over time, so even if one of your stocks was a fantastic buy when you first purchased it, that doesn’t necessarily mean it’s still a strong choice now.

    It’s equally important to examine big-picture factors, too, like whether a company has a durable competitive advantage that can help it keep up with industry changes. A competent executive team is also critical, as bad leadership can cause even strong companies to struggle.

    3. I’m keeping a long-term outlook

    The future is uncertain, and that can be incredibly nerve-wracking for investors. If you’re feeling scared about what may be in store for the market, that’s normal, and you’re not alone.

    In times like these, looking back at the market’s long-term history can be helpful. In the last 25 years alone, the market has faced the dot-com bubble burst (which became one of the longest bear markets in S&P 500 history), the Great Recession, the COVID-19 crash in 2020, and the most recent bear market throughout 2022.

    ^SPX data by YCharts

    Despite all of that volatility, though, the S&P 500 is up by more than 300% since 2000. If you’d invested $10,000 in 2000, you’d have nearly $41,000 by today — even after accounting for all of the severe ups and downs in that time.

    As daunting as they are, downturns are a normal part of the stock market’s cycle. While you can’t avoid them or predict exactly when they’ll begin, keeping your focus on the years ahead can make it a little easier to get through them.

    The Motley Fool has a disclosure policy.

    The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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