Be prepared for a historic stock market crash

While the stock market’s performing well at the moment, there’s growing talk of a crash. For example, last week, Citrini Research posted a research paper in which it explored how the S&P 500 index could potentially fall 40%-60% in the years ahead.

Is now the time to prepare for a major crash? Here’s my take.

The big risk to the market

Citrini’s paper was really interesting, in my view. That’s because it highlighted some risks that have been on the back of my mind for a while now.

In short, it noted how:

• AI could lead to mass white-collar layoffs and a huge spike in the unemployment rate in the years ahead.
• This could lead to a significant drop in consumer spending.
• Banks could be in trouble as people default on their mortgages.
• A ton of business models could be hurt by artificial intelligence (AI).
• The stock market could experience a huge fall as a result of all the above.

Now, it needs to be pointed out that Citrini’s paper was written as a thought exercise, not a prediction (the authors admit they’re certain some of the scenarios mentioned won’t materialise). The goal was to leave readers more prepared for the future as “AI makes the economy increasingly weird”.

I thought it was good though. Because, as investors, we always need to think about risk management, and not just potential gains.

What I’m doing now

I’m not going to rush out and sell all my stocks on the back of this paper, of course. That wouldn’t be rational (I’ve actually been buying recently). But I do think it’s a good time to think about overall asset allocation. Ultimately, I don’t want to be overexposed to equities, just in case there is a major crash in the years ahead.

Looking ahead, I plan to trim my exposure to stocks slightly (I have a lot of exposure today) and build my fixed income investments and cash pile. This will reduce my risk levels and give me more of a security buffer.

It will also give me plenty of firepower if we do see a crash.

Every crash creates opportunities

Because, of course, a major crash could be an amazing opportunity to build wealth. It could allow me to invest in high-quality stocks at a fraction of their share prices today.

For example, it may be possible to buy shares in British industrial powerhouse Rolls-Royce (LSE: RR.) for under £10 (they’re trading near £14 now). Who knows – we could even see them trade under £5 if the markets have a proper meltdown!

While I’m not a Rolls-Royce stock buyer today, I would almost certainly be one at £5. Because I reckon that would pay off over time.

In the long run, this company has significant growth potential. Not only is it well positioned to benefit from NATO’s increase in defence spending but it also looks set to benefit from the nuclear energy revolution as it’s a major player in small modular reactors (SMRs).

I’ll point out that the company’s exposure to the civil aviation market is a risk. This market could come under pressure if a ton of people lose their jobs due to AI and stop travelling by air.

All things considered however, I think the company’s going to get yet bigger in the years ahead.

The post Be prepared for a historic stock market crash appeared first on The Motley Fool UK.

More reading

• The 1 question everybody holding Rolls-Royce shares should ask themselves today
• Down 50%! 1 beaten-down FTSE 100 growth share to consider buying instead of Rolls-Royce
• Is £5,000 invested in Rolls-Royce shares 5 years ago really worth this much? Wow!
• Meet the ‘Nvidia of the FTSE 100’
• After yesterday’s results, is Rolls-Royce a stock to buy now?

Edward Sheldon has no positions in any shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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