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: http://8ball.tridelphia.net/ 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