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\n\t\tOpinions expressed by Entrepreneur contributors are their own.\t<\/p>\n
As I write this, both the S&P 500<\/a> and the Dow Jones Industrial Average<\/a> are up over 12% since the beginning of the year and more than 20% over the past 12 months.\u00a0 It\u2019s boom times in the markets.\u00a0 But make no mistake: sooner or later, there is going to be another significant stock market contraction. History guarantees that much. What history doesn\u2019t tell us is when<\/em>.<\/p>\n Over the past 50 years, the S&P 500 has fallen more than 10% on 25 separate occasions<\/a> and more than 20% six times<\/a>. People overbuy, overvalue and overextend themselves. It\u2019s just human nature.\u00a0 This time will be no different.\u00a0 Back in the day, there were banking, internet, real estate, junk bonds, recession, inflation, energy and war crisis which caused stock market contractions.\u00a0 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.<\/p>\n No matter how much you may want to deny it, the stock market<\/a> 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.<\/p>\n If you\u2019re like most business owners, you\u2019ve 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.\u00a0 Economics is not a science. It\u2019s an art. It\u2019s psychology. It\u2019s emotions and feelings and confidence and moods.\u00a0 When there\u2019s a blow to all or any of those factors, the impact is felt throughout.<\/p>\n This will happen. So, as a business owner, what should you do to protect yourself?\u00a0 Here\u2019s what I\u2019ve learned over the past 30-plus years living through a number of stock market contractions.<\/p>\n In 2009, during the Great Recession, the Dow fell from a high of 14,165 to 6,547<\/a>.\u00a0 That\u2019s a loss of value of almost 54%. Imagine living through that. Like me, maybe you don\u2019t 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.\u00a0 \u00a0Know your history. Stay the course.<\/p>\n If you had your money in an S&P stock index fund, your $100,000 in investments from 2021 \u2014 five years ago \u2014 would now be worth about $175,000.\u00a0 Even if today\u2019s markets drop 20%, it\u2019s still a pretty big win, don\u2019t you think? If you\u2019ve already made 70% over five years, giving back some of those gains in a correction doesn\u2019t mean you\u2019ve suddenly become poor. You\u2019ve heard that the stock market generally outpaces all other markets over the long term. It\u2019s true. Don\u2019t be greedy. Be grateful.<\/p>\n I know it\u2019s fun to speculate, but try to limit your investments<\/a> in individual stocks unless they\u2019re 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,\u00a0 it\u2019s Microsoft, Amazon, American Airlines and Marriott). Keep the lion\u2019s 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\u2019re able, spread your investments between stocks, bonds and real estate.<\/p>\n There are significant tax deductions when you lose money on a stock.\u00a0 You can sell it and offset the loss against any capital gains up to $3,000 and then carry the rest forward.\u00a0 In addition, you can use a tactic known as a \u201cwash sale,\u201d 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.\u00a0<\/p>\n When markets fall, the banking industry tends to freeze up and everyone runs for cover.\u00a0 They limit new loans and re-evaluate existing loans.\u00a0 If you know this is going to happen in the future, then it\u2019s best to open, secure and renew available working capital lines of credit for your business now so that they\u2019re 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.<\/p>\n CNBC will put red arrows on the screen. Websites will run photos of terrified traders. Experts who didn\u2019t predict the crash<\/a> will confidently predict what happens next. Ignore most of it. This is how we in the media earn our money \u2014 we create fear and we count the clicks.\u00a0 Most of the stock market and economic coverage you\u2019ll read will not make you happy during a downturn, so do your best to limit it.\u00a0 For your mental health<\/a>, turn down or turn off the noise. Go outside. Ride your bike. Walk your dog. You\u2019ll 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.<\/p>\n If you\u2019re able to do so now, try to accumulate some cash<\/a> 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 \u2014 as they always do \u2014 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.<\/p>\n 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\u2019s their job to maximize your returns. It\u2019s also their job to console, comfort, soothe and calm you when the market falls. You\u2019ll find their advice to be helpful, as I always do.\u00a0 However, don\u2019t just have one wealth manager: diversify with two or three. Meet with them once or twice a year and measure their results.<\/p>\n My best clients are always thinking ahead.\u00a0 So should you and I. The markets are no different. We know darn well that there\u2019s going to be a significant contraction; we just don\u2019t know when. But, like so many other uncertainties that impact our business, that shouldn\u2019t stop either of us from being prepared for this inevitable event.<\/p>\n<\/p><\/div>\n As I write this, both the S&P 500<\/a> and the Dow Jones Industrial Average<\/a> are up over 12% since the beginning of the year and more than 20% over the past 12 months.\u00a0 It\u2019s boom times in the markets.\u00a0 But make no mistake: sooner or later, there is going to be another significant stock market contraction. History guarantees that much. What history doesn\u2019t tell us is when<\/em>.<\/p>\n Over the past 50 years, the S&P 500 has fallen more than 10% on 25 separate occasions<\/a> and more than 20% six times<\/a>. People overbuy, overvalue and overextend themselves. It\u2019s just human nature.\u00a0 This time will be no different.\u00a0 Back in the day, there were banking, internet, real estate, junk bonds, recession, inflation, energy and war crisis which caused stock market contractions.\u00a0 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.<\/p>\n No matter how much you may want to deny it, the stock market<\/a> 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.<\/p>\n<\/p><\/div>\nFor starters, pay attention to history<\/h2>\n
Check your greed<\/h2>\n
Next, make sure your assets are diversified<\/h2>\n
Take advantage of significant tax deductions<\/h2>\n
Get your financing in place<\/h2>\n
Turn off the internet<\/h2>\n
Build your cash reserves now, so that you can buy later<\/h2>\n
Finally, work with a wealth manager<\/h2>\n
Key Takeaways<\/h2>\n
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