How Can You Spot a Market Crash Before It Happens?
Jan 12, 2025Hello Stoic Investors,
Today, let’s talk about how to spot signs of a market crash and, more importantly, how to stay calm and in control of your investments.
A key lesson from Stoicism is to always be prepared and composed when things get uncertain.
This approach works just as well for investing as it does in life.
The goal isn’t to guess the future but to be ready for whatever comes.
What Is a Market Crash?
A market crash happens when stocks or other investments lose significant value quickly, often triggered by panic selling or bad economic news.
Crashes typically start with overvalued markets, where prices are far higher than the actual value of companies or assets.
These inflated prices eventually become unsustainable, leading to corrections that can spiral into crashes.
Understanding whether the market is overvalued is the first step to being prepared.
To help you recognize if the market is overvalued and take appropriate actions, follow these three steps:
Step 1: Open Google and Search CurrentMarketValuation.com
This website is a simple and helpful tool to check if the market is overvalued or undervalued.
It uses easy-to-understand indicators to show you the current state of the market.
Step 2: Look at 3 Key Indicators
Here are three indicators I like to use to see if the market is overvalued or undervalued:
1. The Buffett Indicator: This compares the total value of all stocks to the economy’s size (GDP). If the ratio is much higher than usual, the market is overvalued. If it’s lower, the market may be undervalued.
2. The S&P 500 P/E Ratio: This measures how much people are paying for a company’s earnings. High numbers suggest the market is overvalued; low numbers mean it’s undervalued.
3. Mean Reversion: This checks how current prices compare to their long-term averages. If prices are far above the average, the market is overvalued; if they’re below, it’s undervalued.
Step 3: Adjust Your Plan
If these indicators show the market is overvalued, here’s what you can do to stay smart and safe:
- Keep investing in a Global ETF: Spread your money across many markets to lower your risk
- Cut back on risky investments: Avoid putting too much into high-risk stocks that might drop a lot in value
- Save cash: Having extra cash means you can buy stocks at undervalued prices if the market drops.
The key to Stoic investing is focusing on what you can control.
As Marcus Aurelius said, "You have power over your mind — not outside events. Realize this, and you will find strength."
By staying informed and keeping a calm mindset, you can handle market ups and downs like a pro.
Being prepared isn’t about fear; it’s about confidence.
So note down these three key points and start investing today:
1. Being a Stoic investor means staying prepared and focused, no matter the market conditions.
2. Overvalued markets often lead to corrections or crashes—understanding this is key to protecting your investments.
3. Use clear steps and reliable tools to make confident and informed investment decisions.
