Will the Market Crash? (Part 1)
Market declines are common.
(Source: Link)
However, no one knows when they will happen. The biggest single day market drop happened on October 19, 1987, when the Dow Jones Industrial Average dropped over 22% in a single day! This is now known as Black Monday.
But did this matter?
Take a look at the chart of the Dow Jones below. Can you can spot Black Monday?
It’s barely noticeable. Today, the Dow is above 26000! In the long term, it did not matter. If your focus is on owning good businesses for the long term, I don’t think it really matters. Good businesses will adapt and continue to thrive in any economic environment.
With that said, I do agree that dealing with all the negative market sentiment and headlines out there can be difficult. Here are some guiding principles I use for dealing with negative sentiment, events and predictions.
Bear Market Guiding Principles
No one can predict market downturns with any useful level of reliability.
We have already established that stocks can get disconnect from their fair values [Link]. Even Berkshire Hathaway, the holding company run by the best investor in the world, Warren Buffet, has experienced three ~50% drops during its existence [See Page 10]. So, to be a successful investor, you need to be ok with market volatility.
Gains far outweigh losses from downturns.
There will always be people predicting that the next downturn is coming. Unfortunately, at some point they will be right. But if you listen to them, and get scared and exit your investments, you would likely forego great investment gains while those predictions would have been wrong. For example: People have been calling for a downturn for several years. If you had listened to them, you would have missed out on the following gains (if you had simply invested in the S&P500):
~100% gains since 2013
~60% gains since 2014
~40% gains since 2015
~40% gains since 2016
~30% gains since 2017
~10% gains since 2018
Bull markets climb a Wall of Worry.
Markets tend to fool the majority. Right now, sentiment is very poor and this continues to be one of the most hated bull markets, despite being pretty much at all-time highs. Troubling events you can readily see unfolding are rarely the cause of a bear market. Think about all the negative events that caused market anxiety over the past several years: US elections, US gov’t shutdown, Brexit etc. None of these caused a prolonged downturn.
Bull markets do not die of old age.
Instead, something needs to happen, which causes a bear market. We will discuss this more in Part 2.
A bear market will occur at some point.
We may already be in one. The best investment approach however, is to ignore it since you can’t predict it or avoid it without forgoing gains. However, you have to possess the emotional stability to stick to your investment approach when the bear market does arrive. A good way to do this is to continue investing periodically, irrespective of short term market volatility.
An unsettled mind will not make good decisions, so only invest amounts within your comfort level.
Assume the market drops 40-50% tomorrow. How would you respond? Would you be ok losing that much of your portfolio? If not, reduce your exposure to a level where you are more comfortable.