Stock Market Crash 101: How to Protect Your Money

A stock market crash can be devastating to investors with exposure to the stock market. For example, the stock market crash of 2008 caused the Dow Jones Industrial Average (DJIA) to plummet 53% in the 17 months between October 2007 and March 2009.

Those potential losses of more than 50% make learning how to protect your money from a stock market crash essential for every investor.

Today, we’re going to show you how to protect your money with our simple stock market crash protection guide. But before we get to that, we first want to show you what could potentially cause a market crash in 2017…

What Causes a Stock Market Crash?

In the past, risky speculation has pushed stock prices to overinflated highs before stock market crashes.

Take one of the most famous stock market crashes of all time. Speculative investing pushed stock prices to unsustainable highs before the stock market crash of 1929. Stocks skyrocketed during most of the 1920s, with the DJIA rising 300% between 1922 and 1929.

But the soaring Dow was the result of “irrational exuberance.” Investors mistakenly believed stock prices could only go up. They were even taking out loans to buy stocks. During the 1920s, retail investors took out $120 billion in loans to buy stocks.

On Black Tuesday (Oct. 29, 1929), stock prices began to fall. Investors panicked and sold their stocks, trying to recoup any money they could to save their net worth or pay back their loans. The sell-off was so severe that some investors couldn’t find a buyer for their stocks, no matter the price.

Between 1929 and 1936, the Dow lost 86% of its value. Because much of the money lost had been borrowed, some of these investors couldn’t even pay back their loans.

While we aren’t predicting a 2017 stock market crash, we are seeing signs that stock prices are currently overinflated…

Stock Prices Could Be Soaring Too High in 2017

Since 2009, the Dow has soared more than 200%. The Trump economic rally since Election Day has been the market’s latest catalyst. The Dow rose more than 17% between Nov. 8, 2016, and today.

Not only that, but the Dow’s leap between 20,000 and 21,000 points between Jan. 25 and March 1 was its fastest jump between 1,000-point levels ever.

But the soaring highs aren’t because of market fundamentals. There’s evidence that stocks are being pushed up above their fundamental values.

The Shiller price/earnings (PE) ratio is a famous measure of stock market value. It is currently 29.65, more than 76% above its historical average.

That’s even higher than it was before the 2008 stock market crash, when the Shiller PE ratio hit 27.4 in late 2007.

And one of the reasons stocks have reached these record-highs is cheap money thanks to the Fed. After the 2008 financial crisis, the U.S. Federal Reserve drastically lowered interest rates from more than 5% to 0.25%. Interest rates remained below 1% until June 2017.

Low interest rates (near 0%) meant that borrowing money was cheap and easy. But publicly traded companies used the cheap borrowing costs to finance stock buybacks. Since 2008, firms have purchased more than $2 trillion of their own stock after borrowing over $1.9 trillion.

Those purchases helped boost stock prices, and they would have been more difficult to execute if interest rates were higher.

And now that the Fed is committed to raising interest rates again, the era of easy borrowing is coming to an end.

That could mean the stock market is vulnerable to a correction, or even the next stock market crash, if a sell-off starts.

But our readers will be prepared for whatever the market does, even the worst-case scenario. Here’s our guide on how to protect your money during a stock market crash…

Our Stock Market Crash Protection Plan

Investors may be tempted to sell their stocks during a correction or if they think a crash is coming. But this isn’t the best way to protect yourself or your money. Instead, it’s better to own strong stocks in growing industries that will bounce back after a crash.

That’s why Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks investors should hold on to stocks in what he calls the “Unstoppable Trends.” The trick to making huge profits is to find “must-have” companies that fall into one of these six Unstoppable Trends: medicine, technology, demographics, scarcity and allocation, energy, and war, terrorism, and ugliness (also known as defense). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.

By owning well-run companies in these Unstoppable Trends, you can secure resilient stocks that will charge out of any market downturn, leaving behind anyone who sold off stocks for other assets.

That’s why we’re bringing you three of our favorite stocks from the Unstoppable Trends.

Microsoft Corp. (Nasdaq: MSFT) is a leading company in the Unstoppable Trend of technology.

The reality is that technology is here to stay; individuals and businesses across the world rely on it to function. Microsoft is a well-managed company and is a leader in the tech industry. That means MSFT will bounce back after a downturn.

Microsoft is also constantly innovating to stay on top of the tech world. Businesses and individual consumers are increasingly relying on cloud storage to manage their daily lives. And Microsoft’s new Azure cloud platform is poised to fend off its rivals by integrating Microsoft software, something CEO Satya Nadella calls “software as a service.” So even if the market dives, Microsoft services are still going to be in demand. Its Azure cloud computing service is now the second-largest cloud service in the world.

MSFT trades at $69.99 a share and pays a 2.23% dividend yield.

Becton, Dickinson and Co. (NYSE: BDX) is an example of a play in the Unstoppable Trend of demographics.

BDX is a healthcare company specializing in one-time use medical products used in hospitals and long-term care facilities. That means as populations age, more people will need this type of medical care, and BDX will be in even more demand. People will need healthcare whether the market falls or not.

But BDX is also an exceptionally well-managed company. It has a 10.54% profit margin and maintains a 1.58% dividend yield, even after a $12.2 billion takeover of CareFusion two years ago. That means the company’s capital management is sustainable and will easily survive a market downturn. And that’s good news for its shareholders during a stock market crash.

BDX trades at $196.47 and pays a 1.49% dividend yield.

Raytheon Co. (NYSE: RTN) is our play for the trend of war, terrorism, and ugliness.

Raytheon is a leader in the defense industry with billions in contracts with the U.S. government and other countries across the world. That means even if the market falls, Raytheon is going to continue to excel over the long term.

Raytheon has billion-dollar contracts with the U.S. government, but it also has a diverse customer base. International customers make up just under half of its business. That means even if a few countries cut defense spending during an economic downturn, RTN still has plenty of other customers to help it weather the storm.

But RTN’s real allure as an Unstoppable Trend pick is the fact that war is a reality of the world. For instance, the United States just made a $110 billion deal to allow Saudi Arabia to purchase weapons from U.S. companies, and Raytheon is a benefactor.

RTN currently trades at $166.35 a share and pays a 1.92% dividend yield.

Even though stock market crashes can lead to losses in the short term, investing in strong companies in “Unstoppable Trends” will protect your money in the end.

Editor’s Note: “Must-have” companies backed by Unstoppable Trends are a cornerstone of Keith’s wealth-building strategy. But there’s another type of investment he wants Money Morning Members to know about. It’s one of his favorites, a kind of “desert island fund” he’d buy if he had to park his money in one place, “retire” from civilization for 20 years, and come back to a pile of money. Click here to learn more…