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Key Takeaways
- Stock market contractions are inevitable — the S&P 500 has fallen more than 10% on 25 separate occasions over the past 50 years — and they ripple through every business by shaking customer, employee, and investor confidence.
- Business owners can prepare now by diversifying investments, building cash reserves, securing lines of credit, and working with a wealth manager, rather than scrambling once the downturn hits.
As I write this, both the S&P 500 and the Dow Jones Industrial Average are up over 12% since the beginning of the year and more than 20% over the past 12 months. It’s boom times in the markets. But make no mistake: sooner or later, there is going to be another significant stock market contraction. History guarantees that much. What history doesn’t tell us is when.
Over the past 50 years, the S&P 500 has fallen more than 10% on 25 separate occasions and more than 20% six times. People overbuy, overvalue and overextend themselves. It’s just human nature. This time will be no different. Back in the day, there were banking, internet, real estate, junk bonds, recession, inflation, energy and war crisis which caused stock market contractions. Today, there are many of the same factors, with the addition of crypto, terror attacks, AI and data center over-investment. All, most or any of these factors will contribute to the next contraction.
No matter how much you may want to deny it, the stock market has an enormous impact on your business. Customers delay purchases, banks tighten lending standards, investors become more cautious, employees get nervous about their 401(k)s, owners see their personal net worth decline, vendors become more aggressive about collections, hiring gets postponed and capital spending is curtailed.
If you’re like most business owners, you’ve got your company, personal, retirement and college fund savings invested in the markets. So do your employees. So does everyone else. When the markets drop, it causes a collapse in confidence in the economy. People feel less wealthy, and they get scared. The impact reverberates. Economics is not a science. It’s an art. It’s psychology. It’s emotions and feelings and confidence and moods. When there’s a blow to all or any of those factors, the impact is felt throughout.
This will happen. So, as a business owner, what should you do to protect yourself? Here’s what I’ve learned over the past 30-plus years living through a number of stock market contractions.
For starters, pay attention to history
In 2009, during the Great Recession, the Dow fell from a high of 14,165 to 6,547. That’s a loss of value of almost 54%. Imagine living through that. Like me, maybe you don’t have to imagine. It was ugly. But what eventually happened? The markets recovered. They always do. Now the Dow is more than eight times the value over its low recorded in 2009. Know your history. Stay the course.
Check your greed
If you had your money in an S&P stock index fund, your $100,000 in investments from 2021 — five years ago — would now be worth about $175,000. Even if today’s markets drop 20%, it’s still a pretty big win, don’t you think? If you’ve already made 70% over five years, giving back some of those gains in a correction doesn’t mean you’ve suddenly become poor. You’ve heard that the stock market generally outpaces all other markets over the long term. It’s true. Don’t be greedy. Be grateful.
Next, make sure your assets are diversified
I know it’s fun to speculate, but try to limit your investments in individual stocks unless they’re a relatively smaller part of your overall wealth and are mostly in companies with strong financials, well-known brands and that you regularly use and trust (For me, it’s Microsoft, Amazon, American Airlines and Marriott). Keep the lion’s share of your stock investments in mutual funds, indexed to sectors and larger, more stable corporations. They will ultimately recover from a contraction. Also, if you’re able, spread your investments between stocks, bonds and real estate.
Take advantage of significant tax deductions
There are significant tax deductions when you lose money on a stock. You can sell it and offset the loss against any capital gains up to $3,000 and then carry the rest forward. In addition, you can use a tactic known as a “wash sale,” where you sell the stock and then buy it back after 30 days. You can then add that loss to the basis of the stock, thereby lowering your overall taxable gain in the future if and when the stock has regained value and you sell it.
Get your financing in place
When markets fall, the banking industry tends to freeze up and everyone runs for cover. They limit new loans and re-evaluate existing loans. If you know this is going to happen in the future, then it’s best to open, secure and renew available working capital lines of credit for your business now so that they’re able to be used if you have any liquidity issues during a downturn. You may pay additional fees today, but consider it insurance for tomorrow.
Turn off the internet
CNBC will put red arrows on the screen. Websites will run photos of terrified traders. Experts who didn’t predict the crash will confidently predict what happens next. Ignore most of it. This is how we in the media earn our money — we create fear and we count the clicks. Most of the stock market and economic coverage you’ll read will not make you happy during a downturn, so do your best to limit it. For your mental health, turn down or turn off the noise. Go outside. Ride your bike. Walk your dog. You’ll find that the world is still there and looks exactly the same as it did before the markets fell. And it will look the same generations later.
Build your cash reserves now, so that you can buy later
If you’re able to do so now, try to accumulate some cash and put it in an interest-bearing account. Because when the market falls, all stocks will fall, even the ones of companies that have strong earnings, great brands and competent management. Those companies — as they always do — will recover and will probably exceed even their value before their stock declined. Your goal is to snap up a few shares at a discount so you can ride this recovery.
Finally, work with a wealth manager
You know your business. The stock market people know their business. Just like you rely on electricians, shippers, marketing agencies and accounting firms for their expertise, so should you be doing the same with your individual and corporate savings. Use a wealth manager and, yes, like all the others, pay their fees. It’s their job to maximize your returns. It’s also their job to console, comfort, soothe and calm you when the market falls. You’ll find their advice to be helpful, as I always do. However, don’t just have one wealth manager: diversify with two or three. Meet with them once or twice a year and measure their results.
My best clients are always thinking ahead. So should you and I. The markets are no different. We know darn well that there’s going to be a significant contraction; we just don’t know when. But, like so many other uncertainties that impact our business, that shouldn’t stop either of us from being prepared for this inevitable event.
Key Takeaways
- Stock market contractions are inevitable — the S&P 500 has fallen more than 10% on 25 separate occasions over the past 50 years — and they ripple through every business by shaking customer, employee, and investor confidence.
- Business owners can prepare now by diversifying investments, building cash reserves, securing lines of credit, and working with a wealth manager, rather than scrambling once the downturn hits.
As I write this, both the S&P 500 and the Dow Jones Industrial Average are up over 12% since the beginning of the year and more than 20% over the past 12 months. It’s boom times in the markets. But make no mistake: sooner or later, there is going to be another significant stock market contraction. History guarantees that much. What history doesn’t tell us is when.
Over the past 50 years, the S&P 500 has fallen more than 10% on 25 separate occasions and more than 20% six times. People overbuy, overvalue and overextend themselves. It’s just human nature. This time will be no different. Back in the day, there were banking, internet, real estate, junk bonds, recession, inflation, energy and war crisis which caused stock market contractions. Today, there are many of the same factors, with the addition of crypto, terror attacks, AI and data center over-investment. All, most or any of these factors will contribute to the next contraction.
No matter how much you may want to deny it, the stock market has an enormous impact on your business. Customers delay purchases, banks tighten lending standards, investors become more cautious, employees get nervous about their 401(k)s, owners see their personal net worth decline, vendors become more aggressive about collections, hiring gets postponed and capital spending is curtailed.
