Barefoot Investor: Best way to prepare for a stock market crash

As retirement approaches for some, the inevitable stress about money looms. It’s unavoidable. Seriously, everyone over 60 I know stresses about a stock market crash, so let’s talk about how to prepare for it, writes the Barefoot Investor.

CLARA ASKS:

My husband and I are two to three years from retirement. Someone told him there will be a financial downturn this year in Australia and our superannuation will be hard hit. Should we move our super somewhere safer?

BAREFOOT REPLIES:

It sounds like your husband has been hanging out with a tarot card reader (or an economist).

(For my money, tea-leaf readers have slightly more accurate stock market forecasts, and much better wardrobes.)

MORE BAREFOOT INVESTOR

OK, enough of the jokes! The truth is that when you hit 60, you’re going to stress about money. It’s unavoidable. Seriously, everyone over 60 I know stresses about the stock market.

So let’s talk about how to prepare for it:

The first risk you’ll face is a stock market crash just before, or soon after, you retire.

(My old finance professor called this “sequencing risk” — which is a fancy way of saying that a market crash in the years leading up to your retirement will have a significant effect on the income you can generate from your nest egg).

The second risk is that you’ll freak the hell out, sell at the bottom of the market, and go to the “safety” of cash.

The third and final risk is that you’ll leave that money in cash, and get robbed by rising prices (inflation).

The best way to reduce all three risks is by doing the following:

If you’re over 60, start aggressively building up three to five years of “Retirement Mojo” — a cash buffer of living expenses. (If you think you’ll get a pension or part-pension, that’ll reduce the amount you’ll need to save to reach your buffer.)

Better yet, put it on autopilot — contact your ultra-low-cost super fund and request that all future super contributions go to a cash and fixed-interest investment option. However, you should keep the rest of your nest egg in growth assets (within your super fund) to keep your nest egg ahead of inflation.

That way, when the next crash does come — and it will — you’ll be able to say to yourself: “That’s Day 1 — it’s a good thing I have 1095 days (three years) of living expenses set aside to ride this sucker out.”

The Barefoot Investor advises that the best way to prepare for a rainy day is to take steps now.

ARE WE STUPID?

NIC AND PETE ASK:

My wise old man got me and my boyfriend on to your book, and since September we’ve put $35,000 into an account for a house deposit! We have a combined annual income of $140,000 pre-tax.

The problem is, we have our hearts set on an expensive suburb in Melbourne where prices currently range from $750,000 to $900,000.

All our friends are saying we’re stupid for spending so much on a first home. Are we stupid?

BAREFOOT REPLIES:

Yes, you are.

Just for kicks I went to a bunch of banks’ “how much can I borrow?” calculators and put in your digits (as you have probably already done).

And hot diggity dang, each one calculated that you could borrow $850,000 (or more!), despite the fact it would chew up over half of your combined income after tax.

Problem is, these are marketing tools designed to get you in the door, not lending approvals. On your current numbers, I think you have as much chance of getting a loan as I have of getting my kids to eat all their vegies tonight.

JAM JARS DILEMMA

JENNY ASKS:

A burglar stole money from my daughter Linda’s jam jars and wallet! Since September last year, 10-year-old Linda has been working hard and getting pocket money, which she’s divided into her three labelled jam jars. Yesterday a thief came into our house and stole the lot. Last week looked good: $8 in “Save” (we’d banked most, thank god!), $6 in “Give”, and $90 in “Splurge” — she was saving for a phone and her wallet contained $39. Now she has no money and is disappointed. We’ve reported it to the police. Should I replace the stolen money, because I can, and I empathise with her? Or do I put it down to life experience?

BAREFOOT REPLIES:

Please do me a favour and read this letter to your daughter:

Dear Linda,

It’s Scott Pape here, the bloke who wrote the book about Jam Jars.

Your mum told me about what happened with your money. I’m really sorry about that. The person who took your money was probably very sad, and very frightened — and I’m sure they feel really bad about doing the wrong thing. I’m also sure that the police will catch them. What you need to know is that most people are good, and kind. Even people you’ve never met.

After reading your mum’s letter, I went to my own “Give” jar and realised that I had enough money to replace all the coins that were in your jars. So I sent the money to your mum, and she will give it to you! What’s cool about the “Give” jar is that you get to be a hero by helping someone.

Yet the real secret is that you not only make someone else happy, you make yourself happy too!

You Got This!

Scott

Real wealth lies in spending time with family.

PUTTING FAMILY FIRST MAKES US WEALTHY

Before we got married, we signed up for pre-marriage counselling at the local country church.

The pastor asked about our thoughts on work, which was a sticking point: at the time I was working around the clock getting Barefoot up and running, appearing on television and travelling the country most weeks doing paid speaking gigs.

I turned to Liz and said: “If in a decade from now I’m still working my guts out, and travelling constantly around the country, the only reason will be because I’m status hungry, and that I value my work over my family. Whatever excuse I give you in the future … will be a lie.”

(Microphone drop.)

Liz has not only remembered that conversation … she has skilfully reminded me of it at opportune times.

What the hell was I thinking?

Well, life is difficult to measure, which is why money is such a simple substitute for happiness:

Do I have a bigger house than I used to? A better car? A fancier title? Earning more money?

Even millionaires think they need more. In a 2018 Harvard study, 4000 millionaires were asked how happy they were, and how much money they’d need to be perfectly happy. The overwhelming answer? Two or three times more than they currently had.

However, I’ve also spent a lot of time around a lot of really old people (some of them fabulously wealthy). And the one regret that keeps coming up is:

“I wish I’d spent less time working, and more time with my family.”

Now I’m sure there are plenty of things that pre-marriage counselling didn’t pick up on that I totally suck at.

However, I’m proud to say that I haven’t done a (paid) speaking gig since my kids were born.

And this year my oldest son started school, and he’s coming up for his first school holidays. He’s been excitedly telling me about all the things he wants to do with me … like going camping on the farm, and doing lots of secret boys’ stuff.

That’s why in my last negotiation with this newspaper I told them that from now on I wouldn’t work on school holidays.

There was no negotiation. Take it or leave it.

Now that’s real wealth to me.

See you in two weeks!

Tread Your Own Path!

If you have a burning money question, or you want to win a fight with your hubby, go to barefootinvestor.com and #askbarefoot

The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need
(Harper Collins) RRP $29.95

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.

Originally published as Barefoot Investor: Best way to prepare for a stock market crash