Gearing Up For The Next Market Crash
Note: this post appeared on my previous blog and was published 08.29.2018
I recently received an email from a colleague. In his email he asked if I was ready for the impending market crash (his words, not mine). Perhaps not ironically, he sent this email just before history was made on August 22, 2018. This date marked when the bull market that started roaring after the Global Financial Crisis became the longest running in US history.
In addition to my colleague's inquiry, I've been asked many times this year (and years prior), about the "impending market crash." My answer was and remains the same. Here it is:
There's always someone screaming from the mountain top. And it has cost and will continue to cost too many people a lot of money in the markets. The market will correct again. Of that I'm sure. When? I don't know. Neither does anyone else. So instead of worrying about when that will be or trying to time the markets, we'll continue to focus on the factors we can control.
My answer doesn't always seem to ease the concerns, though. And that's okay. My job is to be non-emotional with your money. And regardless of what's going on in the markets, there’s always something for investors to worry about.
Sure, this year has been full of uncertainty. And it seems like every day there's news that might make the stock market crash. 2017 was no different. Same with 2016, 2015, you get the picture.
And as my answer above states, the right thing for long-term investors to do is…nothing.
Still, you might feel differently. I imagine some of you do. And that's okay. It's your money. You're likely emotional about it. And if you’re convinced the next market crash is around the corner, then it might be time to re-evaluate your investing plan. So let's talk about a few steps you can take and that you can control:
First, any steps you take should be small and gradual. And they should be steps we can reverse - you know, in case you turn out to be wrong. And if you turn out to be right, you'll take solace in that. Just remember, small steps. These little steps can help create peace of mind during rocky markets.
Look at the risks in your portfolio under the broadest scope possible.
And that means looking outside of your investments. Maybe you're sitting on a big pile of cash - from a bonus, inheritance, savings, whatever. If so, think about using the cash to pay down or pay off your mortgage. Paying off a mortgage at 4% gives you a 4% return with no risk. And since debt can cause stress and anxiety, especially during a tough economic time, lowering or erasing that debt might help you sleep better at night.
If you’re investing money on a regular basis (aka dollar-cost averaging), you could suspend that program.
Before you turn that savings engine off, be sure to set a predetermined date to start that savings engine back up. Maybe that's six months from now. And the flip side could be you agree to automatically begin buying again if the markets fall by say 20% or more. This could allow you to take advantage of a drop in the market.
*note: if you decide to turn off your savings engine, do not, I repeat DO NOT spend it. Sock it into a separate savings account and automate that savings so it doesn't get consumed by your lifestyle.
Still feeling a little icky about the market after the first two moves?
Then you might be too invested in stocks. Time to trim your allocation. But ease into it - remember, small gradual steps. You might decide to reduce stocks from 80% of your portfolio to 60%. Make those changes over time, not all at once. Maybe that's 5% from stocks to bonds every 6 months. It could be every 3 months. You get the picture.
Becoming a better investor starts with your behavior. Hopefully these tips are a good start and help improve your investor behavior. If you're not sure what to do or how to take action on these tips, let me know.