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Katie and I love talking about investing as we walk alongside Venice beach each night after dinner, and one question keeps coming up: “What if this AI bubble bursts?” The headlines are dramatic, the fear is real, and the temptation to “do something” is strong.
We have started to see lots of articles “How to prepare for a stock market crash” and “What to do if the AI Bubble bursts!”
The good news? You don’t need to predict the future. You just need a plan for each phase of your financial life.
You need a plan that works whether markets soars or slumps. Let’s walk through how to prepare calmly and confidently for a stock market crash.
The good news, if you have done Rebel Finance School you are probably already doing most of this!
The Three Phases of Preparing for a Crash
1. The Earning Phase (Building Your Freedom Fund)
This is when you’re working, saving, and investing for the future. If you have got a job and you are investing some of you monthly take home then you are probably in this phase.
- Strategy: Go 100% stocks (global index fund like Vanguard FTSE Global All Cap) for maximum growth.
- Why: Over long periods, stocks outpace inflation and build wealth fastest.
- Ignore the noise: Market crashes are buying opportunities, not reasons to panic. If the market drops, you’re buying more shares on sale. Just keep investing every single month.
- Emergency fund: Keep cash for short-term needs, but don’t bother with bonds yet, they just slow your growth.
This one is super easy! You don’t need to prepare for a stock market crash, you just carry on investing no matter what. In fact if you are in this phase of your financial life the best thing that can happen for you is a crash!
2. The Sequence of Returns Risk Phase (Around Retirement)
This is the “danger zone” the few years before and after you retire, when a crash can hurt most.
The video on the right is week 10 of Rebel Finance School and covers how to protect yourself at this phase of life in detail. Read on for the brief summary.
What’s the risk? If the market crashes early in retirement, or right before you retire you might have to sell investments at a loss to fund your lifestyle. This is called sequence of returns risk and it is a real thing.
- Toolkit for this phase:
- Flexibility is your superpower:
- Be willing to reduce spending temporarily (skip the big holiday, eat more pizza at home, less at restaurants).
- Consider earning a little extra if needed (side hustle, part-time work, or even geo-arbitrage—move somewhere cheaper for a while).
- Delay retirement by a year or two if a crash hits right before your planned date. That way your portfolio has time to recover and you live off your earnings.
- Asset allocation:
- Some people add bonds or cash (the “bond tent” or “cash cushion”) for a few years around retirement to cover spending if the market drops.
- Others (like us) stay 100% stocks and rely on flexibility instead.
- If you have a defined benefit pension or state pension, that’s like having a built-in bond, don’t double up!
- The purpose of these tools is to stop you selling stocks and shares when the market is down 30%. You need enough to ride out a crash without having so much in cash and bonds that it damages your growth, as they don’t grow like stocks and shares.
- Rebalancing:
- If you do add bonds/cash, rebalance once a year or when your allocation drifts.
- If you’re all in one global fund, it’s handled for you inside the fund but if you use cash or bonds you would need to rebalance between those two different asset classes
- Flexibility is your superpower:
3. The Post-Sequence Phase (After the Danger Zone)
Once you’re several years into retirement and your portfolio has grown (or at least survived the early years), the risk of a crash wiping you out drops dramatically.
- Why? If your investments have doubled or more, even a big crash leaves you with more than you started.
- Strategy:
- You can relax a bit, increase spending if you want, or reduce bonds/cash if you added them for safety.
- Keep tracking your spending and investments with a monthly finance meeting, awareness is your best defence.
- If you are on top of your finances then you can relax as you will ee any potential problems a mile away and be able to react!
This is the phase Katie and I have entered into. We retired with £1M invested which gave us £40k a year to live off. In the 6 years since retirement our portfolio has grown to £2.5M! Even if the market halved in a crash right now we would still be fine.
This is the power of compounding and the growth power of stocks and shares.
The Rebel Finance School Toolkit for Any Crash
- Flexible spending: Cut back when times are tough, and if you get really excited when there is a crash cut back and buy more stocks and shares whilst they are on sale!
- Flexible earning: Be open to earning a little if needed. Depending on whether you love the work you do or not you could find something that would bring in ten grand and that would stop you having to sell stocks and shares in a down market.
- Flexible retirement date: Delay or phase (go part time) your retirement if a crash hits at the wrong time.
- Asset allocation: Use bonds/cash if you want, but know the trade-offs (less growth, less volatility).
- Geo-arbitrage: Move somewhere cheaper if needed. This isn’t possible for everyone depending on kids, phase of life etc. but it is an incredibly powerful tool to reduce expenditure and increase lifestyle.
- Defined benefit/state pension: Treat these as “bonds” in your plan.
- Rebalancing: Adjust your mix if you use multiple funds. If the market crashes then you can live off the cash cushion or bond tent and rebalance whilst stocks are low.
- Stay invested: The 4% rule (or even 5% if you’re flexible) has survived the worst crashes in history, if you stick to the plan.
At the end of the workshop Week 10 – Will I run out of Money, katie and I did the numbers to prove if you had the worst luck ever and retired right before the 2008 great financial crisis whether you would have survived using the 4% rule. You might be surprised at the results…
Bottom Line
You can’t control the market, but you can control your plan. The secret is flexible spending, earning, timing, and asset allocation. Most people who follow this approach don’t just survive, they thrive, often ending up with more money than they started with.
Let us know what you think, if you are preparing for a crash, what your strategy is in the comments below.
This article is part of a series I am writing about the AI bubble to share ideas with you that will help you no matter what the market is doing.
Here’s the whole series of articles for you:
- Are we in an AI bubble?
- How to Prepare for an AI Bubble crash next – The Three Phases of Investing
- Lessons from past Bubbles – what history has taught us
- Could an AI Crash hit your global index fund?
The key message I want you to take away from this series is that if you are prepared, know what you are doing and ignore the media hype you will be fine…
Sending peace and pineapples
Alan and Katie
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