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I'm going to assume that you're probably at least a little concerned about the possibility of a stock market crash. So today I want to tell you how I prepare for it. My plan is a set of rules that I can rely on to keep my emotions from getting the better of me when, you know, something terrible happens and to keep me from doing something stupid or expensive.
And to make this video useful to as many people as possible, I'll show how this plan and these rules change depending on the stage of my investing: whether I'm just starting out, whether I'm in the middle, like now, or whether I'm approaching retirement or already in it. Please remember that investing involves the risk of losing capital.
Past results do not guarantee future success. This is not investment advice. Please do your own research . And if you are unsure about anything I am talking about today, contact a qualified consultant. First of all, let's admit that absolutely everyone is now convinced that a collapse is inevitable, that we are in a giant artificial intelligence bubble?
People have been talking about this for months, but nothing has happened. But what is really happening? I think, for example, about Jenny and Dave, who are watching this right now, they are ordinary people. People with regular jobs. People's retirement savings will be significantly reduced, and I don't believe they will return to their previous values.
Of course, if everyone knew it was a bubble , it would have burst by now, right? This is not a new phenomenon. People are making terrible predictions about landslides. A great example is the study by Getzmann, Kim, and Schiller. They asked wealthy and institutional investors about the likelihood of a massive one-day crash in the next six months, such as "Black Monday," when the market fell 22% in a single day.
The typical response ranged from 10% at the median estimate to 19% at the mean value. So some pessimists overestimated this percentage. Do you know what the real probability was according to the researchers' estimates? 1.7%. The so-called expert investors were much more pessimistic than they should have been.
Okay , these are monumental historical collapses. What about normal recession levels? How common are they? A 5% decline happens twice a year. 10%—about once every 18 months. A 15% decline happens once every three years. And a 20% decline, which is an official “bear” market, happens about once every six years .
It will happen. We are just terrible at predicting when it will happen. Since 2022, authoritative voices and leaders have consistently predicted a collapse, yet the market continues to grow. Let's say in the last months of 2022 you listened to them, got scared, and simply put away £500 a month in a savings account at 4% instead of investing in the stock market.
Today you would have around £26,000, but if you had continued to buy world market shares throughout this period of panic, you would have £34,500. Even if the market fell by 20% in an instant, which would have been one of the worst days in history, the investor would still have made a profit of £27,600.
Also, don't forget: if you're trying to wait out the crash, that is, to time the market, you have to be right twice. So , you have to know when to sell and when to buy again. If you get even a little wrong, the consequences for your portfolio will be devastating. There were 7,550 trading days between 1996 and 2025.
If you missed just the top 10 of them, the value of your portfolio would be halved. And the majority, 76%, of the 50 best trading days fell either during the crash or in the first two months of the recovery. To understand this better, imagine a 90- minute football match and the words: “I can guess in which seven seconds of the game all the most important events will happen.” You know very well that it will be those seven seconds when you just went to the restroom.
I'm not saying we're not in an AI bubble or that a crash isn't coming. In fact, I claim quite the opposite . Bubbles, busts, minor recessions, pullbacks, bear markets—all of these are inevitable. And people, even so-called experts, make pretty terrible predictions about them. And the price for missing the best days in an attempt to avoid the worst is enormous.
So for me, avoiding the crash, exiting the market and getting back in, is not a reliable and repeatable strategy that I can apply to my portfolio. So what do I do instead? How much a crash hurts depends entirely on what stage of your investment journey you are at. So today we're going to look at three people: someone who's just starting out, someone who's in the middle, like I am right now, and someone who's approaching or already retired.
First of all, I have to say that everything I'm going to talk about is based on my experience as someone who tracks the broad market using index funds. I don't think you can have a portfolio that is mostly made up of individual companies and apply the same logic, as there is no guarantee that the individual companies that are in the bubble will survive it.
Many companies went bankrupt during the dot-com bubble, as an example. So , if you're an investor who's heavily invested in one sector, for example, you only own a few AI stocks, I'm assuming you're prepared for the risks of such a concentrated portfolio, and what I'm talking about today doesn't really apply to you.
Okay, let's start with the investor who is just starting out. At this point, it is your monthly contributions that drive your portfolio, not the market. So you have £5,000 invested and you contribute £300 per month. If the market falls by 20%, your portfolio is reduced by £1,000. That's a little more than your three months' worth of contributions, so you can essentially pay it off very quickly.
Even better, every month that the market falls, your £300 now buys more market share than before. You are and will remain a net buyer in the stock market potentially for decades. So, really, you should want lower prices today. You should literally wish for a crash in the early stages of your investing career.
It's not just me saying this. Here is a quote from a 1997 letter from Warren Buffett, the greatest investor of all time, to his shareholders. Only those who are going to sell shares in the near future should rejoice at the price increase. Potential buyers should prioritize falling prices. Let's say we have two people with starting capital of £5,000, and they both invest £300 per month for 10 years, for a total of £41,000.
They earn the same average annual income , about 7% per year, but the gains they receive are uneven and come in opposite order. So, person A gets a 30% drop in the first year, person B gets the same 30% drop, but in the 10th year. Person A ends up with 69,800 pounds. Person B ends up with about 51,000 pounds.
I think the most interesting observation here is that if neither of them had added a single penny more, if they had just kept their £5,000, they would have ended up in exactly the same position, around £9,100. The order only matters because they keep buying. So, if you invest a portion of your salary every month , a crash will only help you if you buy during that crash.
So really, at this level, the biggest risk to your portfolio is yourself. This is the moment when you log in, see red for the first time , the amount has decreased, and you just think, "no, this is not for me." I'm going to sell everything, wait until the crash passes, and then buy back again. You'd be surprised how many investors do this.
Morningstar's "Mind the Gap" study shows that investors earn about 1.2% less per year than the funds they own simply because they try to constantly get in and out of the market. Losing 1.2% per year for 30 years will cost you about 20% of your total capital. We see this behavior everywhere. When the stock market falls significantly, people start saving less for their retirement benefits.
This is the exact opposite behavior to what people should be displaying at such a moment. If you're happy to buy a stock for 10 and hold it for 30 years, why aren't you excited about being able to buy it for 8 and hold it for the same amount of time ? I think it's important for beginners to understand that crashes don't always happen by themselves.
They are often accompanied by recessions, as in 2008. Perhaps that is why people are contributing less to pension funds, because recessions often lead to layoffs, and the worst nightmare is to lose your job and be forced to sell investments just as the market has collapsed. So if I were just starting out, how would I prepare for failure?
First of all, I would n't try to guess when it will come . I hope I've proven to you that this is a pretty bad idea. Instead, I would write down a few rules today that I can rely on later. You know, I write them down while I'm calm, so that later, under the influence of emotions, I can look at them and remind myself of what my thinking was at that time.
So, my buying rule is: I buy on a schedule, the same amount, on the same day every month, and just automate it. I want to remove my weak human emotions from the decision-making process, in good times and bad, so that there is no temptation to skip a month because of vacation or because of thoughts like, "oh no, I don't want to buy because the market is terrible." The easiest way to do this is to put yourself in a situation where everything happens without your involvement: sign up at work or, for example, through an investment ISA, set up automatic monthly transactions.
Platforms such as Trading 212 and Invest Engine allow you to set up automatic monthly investment in a global index ETF within an individual savings account (ISA) without fees. It simply takes you out of the equation. I have added affiliate links to both platforms in the description for you. Trading 212 will give you free fractional shares worth up to £100 when you deposit one pound, and Invest Engine will give you an investment bonus of between £20 and £200 if you invest £100 and keep it in your account for 12 months.
As for my rule of thumb for beginners when selling: I only sell when I need the money for what I invested it for, or if my goals have changed . The red number in the appendix is not on my list of reasons to sell, and to ensure I am never forced to sell, I keep a reserve fund for essential expenses in easily accessible places .
And finally, my emotional rule. When I have that inner monologue: “oh, this is n’t for me” or “I’ll just sell and wait until things settle down,” I go back to rules one and two, then check out what Damian Talks Money has to say, where I’m sure he’s giving off a healthy dose of positive financial vibes amidst the sea of panic and nonsense that is the vast world of financial media.
There are a lot of people rooting for you here, guys. Everyone is invited. This is normal. This is normal. Okay, what about the mid-level investor, who I find is often overlooked in these discussions, which I don't like because I'm one of them. So, I still contribute money to my investments every month.
I continue to make these contributions and will continue to do so for the decades ahead of me. But after 15 years of investing, my capital has grown so much that fairly minor market fluctuations add or subtract much more than I invest in any given month. The other day my pension fell by £12,000 in 48 hours.
This is equivalent to losing a 2022 VW Golf in just two days. Do you know what that does to a person? I'm not saying this to brag. I'm just trying to point out how the emotional stakes at this level of investing can seem much greater than, you know, when I was a beginner. The numbers are just so much bigger, and that makes me want to take more action.
Part of preparing for such a big fall is understanding what it really looks like for you. So here's a little exercise you can do at home to help you become more aware of this. Take your share and multiply it by 20%. 20% is the mark where we enter an official " bear" market, and that's exactly the impact it will have on your share.
This happens every six years, and the drop can be even greater than 20%. I just want to emphasize this. Now take that number and divide it by the amount you invest in your portfolio each month. If you remember our novice investor, it took him a little over three months to recover his losses. But for someone with average experience who also invested £300 a month but had accumulated £150,000, it would take 100 months to get back to the previous level.
In essence, for them, this drop is equivalent to eight years of savings. You see how much stronger the emotional aspect of falling is at this level. As I said, it motivates action even more. But in fact, the same logic applies at this level as for a beginner. Everything I discussed earlier is completely applicable here.
It's just that the stakes feel much higher. You are still a long-term net buyer in the market, right? But if you look at this number and think you couldn't withstand such a portfolio drop , your risk appetite suggests that you are uncomfortable with this asset allocation. You can change this if you want.
Only this needs to be done before the collapse, not after it. It's fine to say that we all love stocks 100% when the market is rising, but risk appetite is actually more important during a downturn. And it's okay to say that such a drop would be uncomfortable for me, if you understand that for this you would have to give up potential profit.
Here's a table from Just ETF that will help you understand a little. So, as you move from bonds to a 100% stock portfolio, the average annual return increases . But look at the worst years, and more importantly, the biggest drawdowns for each of these portfolios. A portfolio of 100 % stocks fell by almost 50% at one point during this period .
This is a financial crisis. So look at this table, and then at your own portfolio, and ask yourself: What is acceptable to me? And can you achieve your goals if you choose a less volatile path? It's worth reminding yourself that all of these portfolios have their ups and downs. You won't get results without putting in the effort and going through the trials.
So, my rules at the moment are as follows. I continue to buy every month, just like a newbie, but I have reserve funds that are probably larger than I actually need because I keep cash for my personal life and business. So, if during a market crash I felt that I could cover my immediate expenses and have some spare cash left over, I might consider investing it, that is, buying during the drop to take advantage of lower prices .
My selling rule: I don't sell just because prices are falling. If I want less volatility in my portfolio, I make changes when things are calm, before the crash. But some sales may still occur. So, if I held bonds, I would rebalance when the asset allocation deviated from the desired one by more than 5 percent.
The advantage of this is that you are selling bonds to buy stocks. So you sell bonds to buy cheap stocks. That's pretty good, isn't it? Another type of sale I might consider is transferring funds from taxable accounts to ISAs or retirement accounts, because when prices are low I can move more of my assets into tax havens with significantly less capital gains tax.
And my emotional rule is quite simple. Because the emotional stakes are higher at this level and the sums are larger, I find out what I can handle before the collapse happens. I don't let the collapse dictate this figure to me. Okay, what about our last person , if you are approaching retirement or already in it?
If you are at this stage in your life and are worried about the market crash, you have good reason to be. You are no longer a net buyer of shares, you are a net seller. You don't buy them cheap anymore, you sell them cheap. Remember how the landslide helped Person A earlier? Here everything is exactly the opposite.
If you had two pensioners with £500,000, each withdrawing £ 20,000 a year indexed to 3% inflation, and they had the same return as the beginners, then if the first year collapses, after 10 years you would be left with around £524,000. And with steady growth, in 10 years you will have about 643,000 pounds.
So the 4% rule, invented by Bill Bengen, says that no matter how much money you have on retirement, you can withdraw 4% of that amount, then adjust it for inflation each year, and that should get you through a typical retirement. It is worth noting that this rule was designed for very bad conditions.
Essentially, for the worst market conditions in history. It is generally accepted that this rule is very cautious. If you follow the 4% rule, you are more likely to end up with five times more money than you started with, rather than ending up with less than you had. Of course, you may be very unlucky, but I think it's worth reducing the fear of this period a little , especially regarding rules like the 4% rule, which are often quoted on the Internet.
So, how do we prepare? About five years before and after retirement is a risk zone. A significant fall at this time will cause you the most damage. Therefore, on the eve of this period, you should check your asset allocation, asking yourself: do I have enough savings? And if it is enough, do I need to reduce risk or hedge my investment portfolio?
Look again at the graph I showed earlier in the middle section. There are other ways to protect yourself. The first is the creation of a significant cash reserve. If you have two to three years of expenses in cash or savings, you can live on them when the market is going through tough times so that you don't have to sell your investments during that period.
You will be able to replenish these cash reserves when the market recovers. If that's not possible for you, you can simply decide not to retire at that point. You can continue to work full-time or even part- time during a recession just to reduce the pressure on your portfolio. Reducing portfolio pressure is also a key strategy.
The 4% rule assumes a steady 4% plus inflation every year, when in reality most people or experts—not me, but those I've spoken to on my podcast—would advise taking a flexible approach to withdrawals. Essentially, in good years you take more, in bad years you take less. You simply adjust your spending, like in a regular family budget, to reduce the pressure on your portfolio when things don't go according to plan.
And finally, if you want complete peace of mind, you can create what is called a minimum income level. A minimum income level is a guaranteed amount of money that you receive each month, regardless of what happens in the stock market. This could be a combination of , for example, a state pension or an annuity.
An annuity is a product that pays a guaranteed income for a certain period or for life. You hand over some of the money, and they provide you with this guaranteed income . People traditionally don't like these products because the rates on them have been terrible in the past, and because they usually take away your capital in the end.
But if, thanks to a state pension and similar products, you cover your basic expenses every month , in any weather, it gives a person a lot of peace of mind. And I truly believe that the emotions during this period are some of the most difficult , because for the first time in your life you are transforming from a saver to a spender.
And you know, I personally would feel pressured because I couldn't work. Of course, I'm not saying that people at this stage of life can't work. Maybe they can. But there will come a time when I won't be able to work. And I find that a bit scary, or I reassure myself that at my current age, if things go badly, at least I can still find a job.
I might not have that luxury, you know, in 40 years. My buying rule at this age is that I buy time and peace, not stocks. So things like guaranteed income, annuities, etc. may be more valuable to my overall happiness than interest rate returns. My selling rule is that I am flexible with how much I charge.
In a good year I take a little more, in a bad year a little less . My emotional rule: the main thing is that basic needs are covered under any conditions, and I remind myself that the 4% rule was created for the worst pensions in history, not the best. I should try to enjoy my retirement . I just have to make my life easier.
You know, I've worked hard for this my whole life , so I should enjoy it. These three investors may look different, but they have one thing in common. Never guess when a crash will occur, and never sell under duress during a crash. And I think the most important thing to understand about crashes is that economists see the fear of a market crash as one of the reasons stocks perform so well in the first place.
People are so afraid of crashes that they avoid the stock market altogether. So those who invest demand high returns for owning stocks. If crashes never happened , stocks wouldn't generate such returns. This is , so to speak, the price of entry into investing. You can't avoid them. You can only be prepared for them.
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