Should I be worried about another stock market crash?

Know the popular superstition that if an athlete or team is featured on the cover of Sports Illustrated it is doomed? If you too believe in jinxes, you may want to bet against the majority of professional money managers who believe the stock market rally will continue, according to Barron’s recent poll.

If history is any indication of the future, these stock market highs will not last forever. In fact, market peaks have typically been followed by sharp declines. The previous record high in October 2007 was followed by a 57% collapse in 2008-09, the previous peak in March 2000 was followed by a 37% plunge, and the last major high before that, in August 1987, preceded the biggest-ever market crash in October 1987. (It’s worth noting though, that market drops have also been followed, eventually, by rebounds. In fact, the market recently set a new record, topping its 2007 high.)

Additionally, the average bull (a.k.a. rallying) market cycle has historically lasted four years before reversing, which is just about how long the current one has lasted.

While most experts agree that a market reversal is inevitable, many believe that it will likely be in the form of a correction of no more than 10%, and not a crash of 20% or more like we saw a few years ago.

Other analysts are not as optimistic. Some point to gold’s recent crash (down nearly 30% from its high in 2011) as an indicator that other market indexes will follow. Some point to misleading economic data that they believe has inflated the market unfairly and temporarily hidden a bleaker reality.

Whether you are a glass-is-half-full or half-empty thinker, the best defense moving forward is to have a well-diversified, balanced portfolio of different kinds of investments including stocks and bonds. That way you can continue to benefit from any extended market rally and minimize losses when the market does reverse, which it will sooner or later.

Check out Jocelyn’s responses to four more frequently asked questions:
Should I buy gold?
How much should I pay for financial advice?
What’s the best way to save for college?
How do you invest your money?

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