The funny thing is, I could have titled this post “the best is yet to come”, the reason being is that we are in a bubble and I have no idea when or where the top is. But what I do know is that there will be a market crash of epic proportions on the horizon. Likely within the next 2-3 years or so. So what are we to do?
During the next market crash all of my holdings in my portfolios will get demolished. I mean torn limb from limb and shaken like a rag doll and pulverized. That’s what’s coming.
I’m not scared. I known what’s coming and I accept it, but do you know what I need to do to prepare for this and what we all should be doing? We should make sure to have a strong 6 to 12-month emergency fund. That’s the only thing you can do and just continue dollar cost averaging into the market. For me what that looks like is continuing to regularly contribute to the stock market and that is called dollar cost averaging; but because we are in a bubble, the market timers are in front and center and their voices are dominating the media and driving the market sentiment. When I tell people a crash is coming the response I usually get is. Well let’s get out of the market so we won’t lose any money.
The problem with this kind of thinking is that identifying the top and bottom of a market is very difficult to do. The problem with getting out and sitting on the sidelines is deciding when to get back in? What will likely happen is that the market will continue to go up another 30 or 40% and by the time the FOMO hits you and you decide to come back in, BOOM! The bottom falls out. On the other hand, Let’s say you nail the top and get back in near the “bottom” and the market drops another 20 or 30% after you get back In. What will likely happen is that you will likely get out and never get back in. That’s because when the rebound starts you will be wondering if another drop is on the horizon and trying to figure this out and in general trying to figure out what the market will do next will drive you crazy. This is quintessential market timing and why it’s not recommended.
So what should you do? Make sure you’re able to handle the crash. Make sure you have enough bonds in your portfolio. Make sure you have enough cash on the side so you won’t have to dip into your portfolio for cash. If that means cutting your contributions into the stock market so you can build up an emergency fund for the crash then do it. If that means selling some off the top to get some reserve cash then do it.
The bottom line is there’s always a market crash or correction coming. This is to be expected and planned for. So do whatever it takes to get that emergency fund up.
One of Charlie Munger’s famous quote is “The big money is not in the buying and the selling, but in the waiting.” In essence you make your money in stocks by holding and waiting and not by buying and selling; Or to put it another way, you will lose money by buying stocks, period; but will gain money by waiting and holding stocks. This is how you get the full benefit of stock ownership. The loss I’m referring to is called a paper loss and so is the gain. It’s not real and is only temporary. It’s only real after you sell. If you set this in your mind that you will lose money by buying stocks then once you in fact lose money in a market correction or crash you won’t be surprised, but no one would want to buy stocks if you told them that, but it’s the truth.
I would like to end this post by leaving an example of an Investors owners contract. I first learned about this from the book The Intelligent Investor and this contract is meant for buy and hold investors. This is a good contract that should be signed by all buy and hold investors; and in times like these it’s best to review this contract or whatever your investing strategy is. If you don’t have a strategy, please consider signing the contract below.
I hereby state and I am am an investor who is looking to accumulate wealth for many years into the future. I know that there will be many times that I will be tempted to invest in stocks or bonds because they have gone or are going up in price and other times when i will be tempted to sell investments because they have gone or are going down. I hereby declare my refusal to let a heard of strangers make my financial decisions for me. I further make a solemn commitment to never to invest because the stock market has gone up and never to sell because it has gone down. Instead I will invest per month ever month through an automatic investment plan or dollar cost averaging program into the following mutual fund/funds or diversified portfolio/ portfolios. I will also invest additional amounts whenever i can afford to spare the cash and can afford to loose it in the short run. I hereby declare that I will hold each of these investments continually through at least the following date. Which must be a minimum of 10 years after the date of this contract. The only exception allowed under the terms of this contract are a sudden pressing need for cash like a health care emergency or sudden loss of a job or a planned expenditure like a housing down payment or tuition bill. I am by signing below stating my intention not only to abide by the term of this contract, but to reread this contract whenever I am tempted to sell any of my investments. This contract is valid only when signed by at least one witness and must be kept in a safe place that is easily accessible for future reference.