Things seem to be on a knife-edge
Even more so than usual, people are interested in stock markets and speculating about what might happen. We’re seeing more news stories about the markets, like the Dow falling 666 points on Friday (spooky!) or Bitcoin being cut in half.
Consider the following:
- stock markets have been going up for a few years now
- the US in particular is looking expensive
- bond yields are going up, so interest rates might rise in the near future
- the Japanese government has been buying stocks, propping up the market
Several people are predicting a melt up, followed by a crash.
So what should we do at this point? Sell everything, go to cash, and wait for the crash?
I don’t think so. After all, we have no idea what is going to happen. People were saying similar things in 2013. If you had gone to cash and waited for the crash then, you’d be looking at huge lost gains, and still no crash in sight. Even a bad crash now would be unlikely to return prices to 2013 levels.
There is a chance that stock markets will continue for rise for the rest of this year or this decade. We just don’t know.
There are some things we can do. We can look at our portfolio and make sure it matches our situation, and our goals.
We can pay down debt and make sure we have decent cash reserves (the last thing you want to do in a crash is have to sell things because you need the cash).
We can avoid large purchases and make sure our job/income is secure.
We can think about what we would do if there was a crash. Imagine how you would feel if your portfolio were suddenly worth half as much. Imagine the doom-laden stories on the news. Imagine the temptation to sell before things get worse.
If that scenario seems unbearable, perhaps you are taking too much risk. Moving some of your portfolio to bonds or cash will probably result in fewer gains going forward, but if it saves you from panicking and making an irreversible mistake in a crisis it will be worth it.
How about you? Are you doing anything to prepare for the coming crash? Any thoughts?
Very good timing for this article. And hit home regarding “risk”. We all have a different tolerance to risk and it is essential to know where you are on the scale. If you are taking on too much risk you won’t be rational or calm when it comes to decision making.
I recently took on too much as the DOW was climbing and got burnt on the way down. I need to constantly reassess my risk exposure.
A lot of people with not much investing experience are getting burnt with cryptos right now. Either they got in at the peak or they got in earlier but their gains are dropling rapidly.
I was kind of wondering when you might write this kind of article. Nothing wrong with it of course. However, if I could say, when the market drips is a time to buy if you’re a long term investor and a time of opportunity. The bond market will raise I believe, but equities still offer better returns over the long run (10+years)
Hi Chris
Of course I agree. The problem with buying the dip (or drop!) is that you need to have money set aside for that purpose, so you need to predict the dip/drop too. This is impossible, as mentioned in the article. You could have set aside money for this purpose in 2013 and it would still be gathering dust in a bank account.
The closest realistic option is to dollar-cost average (yen cost average?) by buying a set amount each month, rain or shine.
This site has some very interesting posts about the investing seasons: http://dropdeadmoney.com/join/
Nikkei is already down almost 5% this morning. This should be an interesting week.
At least my Japanese bonds are up…by 0.02%!
I am clearly an investing genius, having predicted this in my post yesterday 😉
The timing on this seems good, with big stock market drops today 🙂
Ben — since you just nailed the top we are all just waiting for you to call the bottom so we can get back in!
** Jokes of course — market timing is a sucker’s game.
Just join my Premium RJ Club (a very reasonable 50,000 yen a month) and I’ll let you know 😉
Great call on the timing Ben! I (foolishly?) invested my entire NISA allowance last month, but I have some other money I’ve been holding back for the dip. Now the question is, when is the bottom of that dip….
Only the wind knows, my friend. If you listen carefully you can hear it whisper to you…
When we would expect for you to appear on the cover of The Financial Times and at the same time go public with your genius hedge fund?
Can we suggest some witty names for the fund?
Ha, ha, as soon as I send them proof that I called the crash 😉