Ready or not, a stock market crash is approaching.
While we never know precisely when a crash will occur, how long it will last, how abrupt the decline will be, or (in many cases) what will be the catalyst for the decline, history shows that crashes and fixes are a normal occurrence. The story is also pretty clear on the general timeline in which these declines occur – and that’s not good news if you’re looking for this young bull market to stretch your legs.
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One of the biggest red flags can be seen on the front of the rating. the S&P 500‘s (SNPINDEX: ^ GSPC) Shiller’s price-to-earnings (P / E) ratio – a measure of inflation-adjusted earnings over the past 10 years – closed last week at 37.28. For reference, that’s more than double the average P / E of the 1870 S&P 500 Shiller.
The problem is that in the previous four cases where the S&P 500 Shiller P / E ratio exceeded and held 30, the index lost at least 20% shortly thereafter. Precedents suggest that premium valuations like the ones we are seeing now are not well tolerated for long periods of time.
The story also sheds light on how the markets typically react after a bear market bottom. At no time in the past 60 years has there been a bear market that has not corrected between 10% and 19.9% ​​at least once in the three years following the trough. We are now more than 14 months from the March 2020 low and have yet to see a double-digit percentage retracement in the benchmark S&P 500.
In addition, stock market crashes and sharp corrections are commonplace on Wall Street; they are the price of entry to one of the world’s greatest creators of wealth. Since 1950, we’ve seen 38 double-digit declines, down every 1.87 years on average. Wall Street will never precisely track averages, but it does offer a benchmark that declines are normal.
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Here’s where to invest $ 10,000 in the next stock market crash
However, just because a stock market crash is inevitable, doesn’t mean you have to curl up in fear or take your money out of the market. On the contrary, every crash or abrupt correction in history has proven to be an exceptional buying opportunity for long-term investors. If you have $ 10,000 on hand that won’t be needed to cover emergencies or pay bills, that’s more than enough capital to work on those winning stocks in the next crash.
Even though advertising-driven businesses typically struggle during times of panic selling, the social media giant Facebook (NASDAQ: FB) has proven time and again to be the exception. When the next big drop happens, it will be a great addition to your portfolio.
By the end of March, Facebook’s namesake site was attracting 2.85 billion people per month, with an additional 600 million unique visitors from WhatsApp and Instagram, which it also owns. This represents 3.45 billion people, or 44% of the world’s population, visiting at least one of its assets each month. With numbers like these, it’s no wonder advertisers are clamoring for placement on the platform and paying sequentially higher prices to do so.
Plus, Facebook hasn’t even significantly monetized Messenger or WhatsApp, which are two of the best social platforms in the world. The company is on track to generate more than $ 100 billion in sales this year, almost all of which comes from its namesake site and Instagram. Once Facebook begins to monetize its core assets, the company’s cash flow is expected to increase significantly.
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Innovative industrial properties
Do you know what acts like a consumer packaged good during times of recession and panic? Cannabis. When the next stock market crash hits, consider investing some of your $ 10,000 in a cannabis-focused real estate investment trust (REIT). Innovative industrial properties (NYSE: IIPR).
Simply put, IIP, as the company is known, purchases marijuana growing and processing facilities with the intention of leasing those assets for very long periods (10-20 years). At the end of May, IIP had 72 properties covering 6.6 million square feet (in total) in 18 states. These 72 properties are all leased, with a weighted average lease term of 16.8 years. It will take much less than 16.8 years for Innovative Industrial Properties to receive a full return of its invested capital.
The business is also thriving thanks to its sale-leaseback program. Since marijuana is illegal in the United States, not all banks are willing to provide basic banking services to cannabis stocks. To solve this problem, IIP acquires cash facilities and immediately leases the asset to the seller. This allows jackpot companies to strengthen their balance sheets with cash while giving IIP a long-term tenant.
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CrowdStrike Holdings
While it might not be the fastest growing opportunity, cybersecurity is possibly the safest double-digit growth trend of this decade. This is why a stock market crash would be a great time to buy or increase cybersecurity stock CrowdStrike Holdings (NASDAQ: CRWD).
What sets CrowdStrike apart is the company’s cloud-native Falcon platform. Built entirely in the cloud and powered by artificial intelligence, Falcon oversees approximately 5,000 billion events per week. It gets smarter at identifying and responding to threats over time and should be able to do so at a lower cost than on-premises security solutions.
The proof is in the pudding that CrowdStrike customers love its services. It has been able to retain 98% of its customers in consecutive years, with 63% of its customers purchasing four or more cloud module subscriptions in the last quarter.
In some contexts, this is an increase from just 9% who purchased four or more cloud subscriptions less than four years ago. Since cloud subscriptions generate exceptionally high margins, CrowdStrike has already met its long-term goal of 75% to 80% + for its subscription gross margin.
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Red tuna
One last smart way to invest $ 10,000 in a stock market crash is to buy a tech-driven real estate company Red tuna (NASDAQ: RDFN).
Even though Redfin enjoys seemingly perfect housing market conditions, it is a company that has legs well beyond the current housing boom.
One of the biggest lures for Redfin is the cost savings it can offer sellers. While traditional real estate companies charge a 3% agent fee, Redfin charges 1% or 1.5%, depending on how much business an owner has done with the company. Considering how quickly home prices rise, the savings Redfin makes are magnified over time.
Redfin is also distinguished by its personalization. The company’s RedfinNow service, available in select cities, aims to buy homes from sellers with cash, removing less desirable parts of the selling process. Plus, the janitorial service charges up to 2.5% off the sale price to help with staging and other upgrades to maximize a home’s sale value.
This personalization likely played a big role in helping Redfin manage just a 0.44% share of the US existing home sales market in 2015 to 1.14% in the first quarter of 2021.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.