It's no secret that investing in ASX shares has been a lucrative endeavour in 2024. The local share market has had a strong run this year, with the S&P/ASX 200 Index (ASX: XJO) up over 8.5% year to date (not even including dividend returns).
Those that have investments outside of the Australian markets have probably done even better, given that the S&P 500 Index (INDEXSP: .INX) is up more than triple the amount of the ASX 200.
My own investments have been no different, with 2024 being (touch wood) one of the best years for my portfolio in recent memory.
But rather than doubling down on my investments over the latter part of 2024, I have been pulling back. I wouldn't say that I am expecting a stock market crash in 2025. But I am acutely aware that it is a possibility.
For one, it's not normal for the US markets, in particular, to grow by almost a third in just one year. The S&P 500's long-term annual return is not in the 20s. Instead, it is a far more muted 7.29% per annum. If the US markets even come close to 'reverting to the mean', they are set for a significant pullback.
But I also see significant economic disruption as a distinct possibility in 2025 and beyond, thanks to the bombastic trade policies of incoming US president Donald Trump. If Trump indeed places massive tariffs around the American economy and starts a trade war with China, I think there's a decent chance that this will trigger a stock market crash.
Here in Australia, our economic picture isn't exactly that rosy either.
Will there be an ASX stock market crash in 2025?
Now, I'll be the first to say that no one can accurately predict what will happen with the share market over any period of time. I could be laughably wrong here, and the markets could charge even higher in 2025. But I also believe that we should always mentally prepare for the worst possible outcome.
That's why I'm preparing for a stock market crash with my own portfolio.
I'm a believer in being mostly invested in shares, most of the time. After all, the markets go up far more often than they go down. As such, it makes logical sense to invest as much money as we can in shares as soon as we can.
But I also believe that buying quality stocks during a market crash is one of the best ways we can turbocharge our long-term returns.
So, to prepare for a crash next year, I have been letting cash slowly accumulate in my portfolio. I've sold out of a few positions that I didn't have full confidence in this year.
I have also only made small, incremental investments in other stocks. I plan to continue to stack cash until my position is around 10% of my invested portfolio.
This way, if there is a crash next year, I'll have some money available to buy my favourite companies at a discount. And if I'm wrong? Well, 90% of my portfolio will still be invested in the markets.
