Is It Time for the Market to Crash?

Every once in a while, I like to shake the Magic 8 Ball to see what might happen next.  Recently, I’ve been getting a lot of “Reply Hazy.  Try Again” and “Cannot Predict Now.”  This is very frustrating, since I’m supposedly a ‘professional.’ I’ve taken those answers to mean that I need to do a bit more research on my own.

On a complete side note: You now can just use the internet to “shake” the Magic 8 Ball:  Too funny.

Whenever we trend up to either a new high, all-time high, or a cyclic high, I start to get a little antsy…almost like the sensation right before you go over the big hill on the new rollercoaster.  Unfortunately, that analogy works too well.  It seems like whenever we go higher – whenever you start hearing Jim Cramer, etc. telling us all to BUY BUY BUY – a big pullback happens.  Let’s look at where we are today:

This is a Year-to-date chart of the S&P 500.  Up, up, and up some more. (Up 5.35% YTD)

Here’s a chart for the 1-year S&P 500 (Up 10.37%)

And another 5-year chart (Up 11.29% – which also includes the 2008 recession)

And finally, a 10 year chart – up an astonishing 77.14%

Since March 13, 2009, the S&P 500 is up over 119%!  This is wonderful!

But it makes me pause.

As I look through history, and it’s the only guide we have, it seems like every 5-7 years something comes along and knocks the wind out of our sails.  It’s 2013, five years ago was 2008.  Before that was 2000-2002.  Before that was the LTCM mess is 1998.  Then the recession in 1991.  Black Monday in 1987.  Are we on the verge of another recession?  Worse maybe?  A depression?

If you listen to the news, or better yet, the commercials on satellite radio, the answer is an unequivocal “yes!” (I’m talking to you, Mr. “Critical Warning number 6”  guy).

So, what do all the recessions, depressions, declines, flash-crashes, etc. have in common?  The market has always rebounded from them all.  Each an every one.  Ask your grandparents what they thought of investing in stocks in 1940.  Or your parents and grandparents about investing in the 70s.  They’d all say the same thing…”This time is different.”

This time isn’t different.  Today’s apocalypse du-jour is tomorrow’s back page story.

You might think, then, that I must be all smiles all the time and a traditional buy-and-hold forever type of investor.  I’m not.  But neither am I chicken little.  At times like these – when the market’s doubled in just inside 4 years – you must plan for dark days ahead.  If you do, and you make logical, fact-based plans today, when the markets turn tumultuous, you can just pull out the plan you made when you were level headed.


Here’s what might be in your “Time for the Market to Crash” plan:


1.  A profit maximization strategy.  If you’re like some investors, you’ve continued to buy your bi-weekly allotment of 401(k) funds and Roth IRA stocks over the past several years.  That has served you well. It’s time to make sure you have a profit strategy in place.  If you own individual stocks, set a stop-loss price on your positions.  If you have mutual funds, set a day every two weeks or so to review the price.  Write down at what price you’ll sell to lock in some profits.  In my business we try to aim for a trailing 10% stop loss.  For example, if I bought GE at $7, and today it’s at $23, my stop-loss might be at $20.  I’ll continue to adjust that upward as the stock moves higher.

2.  A cash accumulation plan.  Investors who were well prepared for 2008 weren’t prepared by selling all their positions in 2007, but rather they had accumulated a large cash position so that when GE was trading at $6 a share and Warren Buffet plunked down $5 billion, they could do the same.  Since the market’s near an all-time high, it may be time to start directing some of your monthly savings into a pure cash position – ready to strike when the fire sale happens.  Whenever it happens.

3.  A plan for choppy markets.  What happens if the market doesn’t do anything, a la 2011?  Can you still make money?  You sure can.  Consider investing in options, high dividend paying stocks and bonds, as well as investments that profit from volatility.

4.  A plan to educate yourself.  It amazes me how many people I see and talk to each and every day who are completely OK with being an idiot.  You don’t have to go get a master’s degree in actuarial sciences, but it doesn’t hurt to read a little (unbiased) commentary about stocks, investing, the markets, and the history of all those things.  Being prepared for the next “event” whatever it is, means more than just having money set aside in the right places.  It means having a prepared mind as well.

No one knows what’s going to happen tomorrow in the market.  Anyone who says they have even the faintest idea are fooling themselves.  But, that doesn’t mean you should just throw in the towel and bury your head in the sand.  Winston Churchill once said, “Plans are of little importance, but planning is essential”

Make sure you take time this weekend to do a little planning.  Your investment portfolio will thank you later.

All charts from Big Charts

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  1. says

    I run into people all of the time that tell me they know what the market is going to do next. They never do. I’ve had clients sell everything at the end of last year thinking the fiscal cliff was going to destroy the stock market and they are kicking themselves now. Planning is essential, just don’t overthink things and overreact. As you pointed out the market will drop, but then it will come back. And if one day it doesn’t come back, we have bigger things to worry about than money.
    Jon @ MoneySmartGuides recently posted..Why Hire a Financial PlannerMy Profile

    • Average Joe says

      I love your last line. I used to tell that to my biggest doomsday clients when I was an advisor. Why do you worry about it at all if you’re that pessimistic?

  2. says

    “Any one who says they have even the faintest ideas are fooling themselves” Reminds back in 2006 when people (even supply side economists) thought the housing boom would continue indefinitely. I do think you can have indicators, such as before the housing crash when there were various signs that showed a housing “correction” was inevitable…though you can’t really know the exact time. I do agree with people who think inflation will eventually be a lot higher than it is now, and that it is inevitable that inflation increases based on the Feds actions the past few years.
    David Carlson recently posted..Friday Giveaway Roundup – 27 GiveawaysMy Profile

    • Average Joe says

      It’s funny to look back at that, isn’t it, DC? Nobody looked at all of that overdevelopment and said “what the hell’s going on?”

  3. says

    We have the cash and would love to see a solid dip to buy in some more shares. I really thought it was going to happen with the fiscal cliff, but they kicked the can for 90 days on that one. But talk about the market doing anything but going up and the retirees around here shoot daggers with their eyes… it’s dangerous!
    Mrs. Pop @ Planting Our Pennies recently posted..Putting Pain In PerspectiveMy Profile

    • Average Joe says

      Panic in the streets!

      I can imagine their pain. If I were completely retired and didn’t want to go back to work, I’d pray for a market that never fell, too.

      • says

        We are completely retired & are not changing our investments at all. We just rolled a 401k into an IRA at Vangard that is set up for retirees. The fund has a good record and we trust them. Even if the market tanks for a while, it will come back. And our portfolio has risk that is appropriate for our ages. Many of the talking heads on CNBC are saying there will be a big market pullback. But if there is no correction now, there will just be a bigger fall later. So better to get it over with now, they say.
        Maggie@SquarePennies recently posted..Hilarious “Live from the Red Carpet” PartyMy Profile

  4. says

    You definitely have the right idea about planning for a possible crash/correction. Planning ahead so that you know what you need to do if things hit the fan is a wise move.

    At the same time I think it’s important to plan for other outcomes as well. What if things do continue to rise? As someone who has been an active trader for a decade I have repeatedly seen that picking tops and bottoms is usually a losing game. Often it’s best to make a plan that defines exactly when you would consider the market to have shown its hand so that you don’t have to predict. It can make the turns a bit rockier as you need a bit more confirmation of your plan but in the long run it pays off.

    As the brilliant trader Ed Seykota would say, “the trend is your friend until the end where it bends”.
    Cody @ Samurai Trading recently posted..Feb 20th ES Trading Recap – 15 Points – Thanks FOMC!My Profile

    • says

      femme, my 20-something son worries about it becoming a depression. Many people invested in gold to prepare for inflation, but now the price of gold has tanked. One kind of planning that is not wasted is to improve our skill sets. Gardening, cooking, learning to DIY, etc. will stand us in good stead come what may.

      BTW, I tell our son to keep learning new job skills too.
      Maggie@SquarePennies recently posted..Spambots are FunnyMy Profile

    • says

      Haha. Me too, Marvin.

      With the type of trading I like to do there’s more to be made when things go down since the drops tend to be much quicker.

      It’s rough to see people get hurt though when they have too much tied up in individual stocks that might tank. It sounds like you took the right steps to protect yourself in the future through increased knowledge and additional planning. I would like to think most of the people who were hurt in the recent past did the same, but I would guess you are something of a rare breed…
      Cody @ Samurai Trading recently posted..Welcome to Samurai Trading AcademyMy Profile

  5. says

    I’m feeling we may be having a correction too. But now that I’m learning more about this financial stuff, I’m not at all worried. We’re prepared in some ways, getting prepared in others, and getting ready to buy big time if/when the crash comes. George Bailey said in “It’s a Wonderful Life”: “Potter’s not selling, he’s buying. Why? Because we’re panicky and he’s not.” It’s our job, like you said, to educate ourselves and be prepared. If we don’t, we have to expect some possibly yucky stuff.
    Laurie @thefrugalfarmer recently posted..Oops, I Did it Again (Almost)!My Profile

  6. says

    Very important tips here. My thought is that a diversified portfolio of stocks and bonds is the key to success. Your refinements and tips should not alter this view but should be added to it. Timing the market is a fool’s game but accumulating cash for when the market is down sounds like a solid tip. Thanks for your perspective.

  7. says

    I guess you can offset the chance of a loss in the stock market by investing in real estate. It is coming out of a tremendous loss and thus stands to make good returns possible over the next five years. Not that investing in the current real estate market is like shooting fish in a barrel but there are some really good investments out there.


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