4 Patterns That ALWAYS Show Up Before a Market Crash

Market crashes are scary, but they don't come out of nowhere. Certain patterns emerge before a crash occurs. This video will explain the four patterns that show up before a crash, and what smart investors can do to prepare.

In the 1600s, the Netherlands experienced Tulip Mania driven by rampant speculation and investor overconfidence. This Investor overconfidence is the first pattern. People began trading futures contracts for tulips, confident they could flip them for profit, ignoring the real value and risks. The bubble eventually burst, affecting the entire market which exemplified investor overconfidence.

The second pattern is regulatory shortcomings. The Great Depression showed that the market had grown quickly and the guard rails hadn't kept up. Leveraged investment trusts took on excessive debt, and investors bought stocks using debt fueled by the belief that markets always go up. The government's laissez-faire approach allowed instability to build up, leading to the 1929 crash.

The third pattern is a new, poorly understood innovation. In the 1980s, portfolio insurance, a complicated system designed to limit investment losses through computer-driven trades, was introduced. However, the banks themselves didn't fully understand how risky it could be. Additionally, Investors were doing leveraged buyouts and these factors collided when the bubble started deflating. This caused stock prices to drop, and the computers started triggering sell orders, leading to the 1987 crash, amplified by the poorly understood innovation.

The fourth pattern is the buildup of debt. Before 2008, household debt grew rapidly. Banks handed out mortgages to anyone and sold them off to investors without disclosing the risk. The government, banks, and borrowers didn't take initiative in stopping the debt levels from rising. The debt would eventually have to be paid back, although no one thought that housing prices could drop. The collapse triggered the worst financial crisis since the Great Depression.

To spot a future crash, consider: investor overconfidence, regulatory shortcomings, new/poorly understood innovations, and the buildup of debt. To protect yourself: don't sell stocks for cash, be careful with alternatives like gold, don't try to time the drop, and invest when you have the chance. Having a plan based on these patterns can help you weather the next market crash.