Is coming… someday.
The US stock market seems to be getting expensive. It looks somewhat like a bubble, but things aren’t the same as they were in 2007. Basically no-one knows what is going to happen, but there is going to be a stock market crash at some point.
Could be this month, this year, next year, in five years time.
No one knows.
Rather than worrying about when the crash is going to happen, I believe it is more important to think about how you will react.
Having a plan, especially if you write it down and reference it when the time comes, will help you avoid reacting emotionally.
Here are my thoughts on the next crash. They are the thoughts of a guy with no particular background in investing, writing a blog on the internet. Needless to say you should not take them as gospel, but instead do your own thinking and seek advice from trustworthy sources (if you are paying for the advice, make sure the person you are talking to has a fiduciary responsibility).
Here is what I believe:
- There will be a stock market crash at some point
- No-one knows when it will happen
- When it happens, people will panic
- The media will run lots of sensational articles about how we are all doomed
- It will be impossible to predict the bottom of the market
- People with spare cash will be able to buy stocks cheaply
- The yen will get stronger as people rush to safety
- The markets will recover eventually
Now, I could be wrong about some of these. There is a small chance that I am wrong about number 8, and we suffer a catastrophic crash that we never recover from. I suspect I’ll have bigger worries than how my portfolio is doing in that case though…
So what can we do?
Here’s what I am doing at the moment. Remember, I don’t know what I am talking about so you shouldn’t take this as something that you should do.
- Most importantly, after a crash I’m planning not to sell anything or change our portfolio allocation.
- I am continuing to invest every month. My 12,000 yen a month to iDeCo and 40,000 yen a month to THEO are automatic now and I’m not going to mess with them.
- I am starting to accumulate cash (dry powder). When my wife or I have extra money to invest, I only invest half of it and keep the other half in cash in yen. We’re slowly building up a war chest so we can go shopping during the next crash.
- I made a plan on how to invest. Right now it’s very simple: if there is a crash (defined as everyone losing their minds in the media) then we will buy things that look cheap but won’t spend more than 25% of our war chest each month. Hopefully this will help us avoid buying too early.
What do you think? Do you agree with my analysis? How are you planning to deal with the next crash?
Good, level-headed advice. I too am building up a store of cash in the hope that stocks will go on sale in the not too distant future.
My only quibble is the prediction that the Yen will appreciate in a flight to safety. I think this is a risky assumption which may not prove true in the next crisis. My future salary and a lot of my wife’s savings are valued in Yen so I try to keep my cash savings in other currencies (and also gold, but I am a bit weird that way) as a hedge against its possible depreciation in the future (which given the debt levels here seems inevitable to me).
Oh, I agree with you long-term. About 90% of our investments are in foreign currencies as I don’t expect the yen to hold up in the long term. I also want to hedge our yen income and future yen pensions, etc.
However, in the short term I believe people rush to buy yen during crises. So I expect the yen to gain against the dollar if there is a stock market crash in the US. By keeping our war chest in yen I am hoping this will give us a bit more purchasing power at the time.
We’ll see how it turns out!
Fair enough. I would love to see the Yen go back up to the 85-90 Yen to USD range so I hope you are right!
JPY will almost certainly get much stronger in the event of a crash, along with gold and, to a lesser extent, other low-yielding currencies such as CHF and EUR. This is because investors and traders like to bring their money home in the event of a crisis, so they unwind their carry trades. International investors are also likely to unwind carry trades due to the new risk they’ll associate with higher yielding currencies.
Also, the N225 and JPY are highly inversely-correlated due to the importance of exporters (who prefer a weaker yen) to the economy. If world stocks dive then the Nikkei will dive too, so the yen will get stronger.
Even if the crash is caused by an event that has a direct impact on the Japanese economy, such as a North Korean missile strike, the yen is likely to strengthen. This article about the effect of the 2011 earthquake and tsunami on JPY explains why:
https://www.theguardian.com/business/2011/mar/17/japan-yen-question-and-answer
But the good news is that the fall of the Nikkei and rise of the yen is likely to be temporary, for the reasons Ben mentions above. Real money will be buying stocks and selling yen in bulk at the discount prices, especially if the BOJ’s policy remains unchanged. It will be the sale of the decade, so let’s hope we can snap some up too!
I’d like to clarify what you mean by most of your investments are in foreign currencies. Does that mean you have bought and are holding them in foreign currencies (USD, GBP etc) or that you have purchased in foreign markets (NYSE) and the transaction was completed using JPY.
The reason Im asking is I have made initial share purchases in the latter case, and recently Ive been contemplating selling them when the price is still high, and the exchange rate is still favourable (getting more JPY back as the USD is still up)
Admittedly these purchase were made before I realised the degree of exchange rate risks, and now Im wondering if I should do something now before JPY rises again.
Watch ( or re-watch) the Big short movie or read the book. Michael Burry was able to predict the subprime crisis and towards the end of the movie someone on the phone yells at him for buying stocks which are falling. However, this was again right move: buy stocks when they are cheap or getting cheaper.
I have also the feeling that there is a small bubble at the moment so I am cautious and will wait a little.
Also, Years ending in 7 are not usually good for the economy: 1987 crisis in US; 1997 crisis in Asia; 2007 beginning of the subprime crisis… Just an observation…
Either foreign shares/ETFs denominated and bought in USD, or foreign assets in yen-denominated mutual funds.
Very good advice. Goes completely against the doomsday proclamations by practically every major media outlet, which incidentally is also how real capital gains are made.
One thing that I personally am currently doing is to use this bubbly time to build up a huge reserve AND also increase my credit score as much as possible.
This is to make sure that when the next big crash comes, I can be able to average down systematically, whilst negotiating cutthroat prices for real estate which are in a hurry to be sold off š
You’re a braver man than me going for real estate š
Would you invest in the Japanese market, US market or another market when the next crash comes around and for what reasons?
A different topic but it would be useful to get info about the service levels and fees of the main internet providers in Japan.
Hi Dan
I tend to buy dividend paying stocks or global stock funds, so probably a mix of those. It will also depend on what kind of crash, ie if the UK crashes post-Brexit I might buy British share ETFs, etc.
Internet providers would be useful! I haven’t looked at them for a long time so have just been dumbly using OCN…
Sure, I had to ask. We had OCN before switching to one of the big three mobile phone providers for home internet.
How are you finding the new service? Noticeably better or worse than OCN? How about the price?
Great advice. Im trying to mentally prepare and condition myself to see the inevitable crash as an opportunity and not a disaster, but I still know it’s gonna hurt.
How are you planning to invest if your NISA is maxed for the year? THEO? Or a regular tax reporting account? Or a combination of the two? I’m wondering if it’s worth opening a regular investment account now for overflow when/if the crash does happen.
THEO for general investing and regular investment account for individual shares. Unless we’re lucky and the crash happens at the beginning of the year š
Agree with everything you outlined.
From my experience of over 30 years of investing, my biggest recommendation, especially for younger investors, is to invest a set amount of money monthly in investments which have preferably no cost. (I invested in U.S. no load mutual funds) By making regular investments, the ups and downs get smoothed out.