Not a Matter of If but When…

I am talking about the next Bear Market. The stock market has been going up pretty much non-stop since March 2009 (see below). Stock market advances do not end just because of old age, but nothing grows to the sky and eventually we will get a recession and a market downturn after this impressive expansion.

The U.S. economy is in good shape today, growing 2% to 3% in real terms with moderate inflation and only slightly rising interest rates.  The recent tax loss changes will benefit both corporate profits and consumer spending. But a recession and a stock market correction will occur at some point.

How should you prepare?  First, if you have done your homework, meaning you have established a sensible asset allocation between things that are safe (bonds and cash) and things which will grow (stocks) then you really don’t have to do much. Just don’t let your emotions get the better of you.  Common stocks tend to go up 6 or 7 years out of every 10 and stock returns over long periods of time will equal the long term growth in corporate profits (4-6% today?) plus a dividend yield of 2%, or a total return of 6-8%. Keep this positive investment message clearly in mind especially when the ominous dark clouds start to appear. 

Second, review your spending and borrowing. Now is a good time to reduce your borrowings and prudently look at any spending that can be cut.  Don’t panic, just do some realistic planning and realize that finances get more difficult in tough economic times. 

And finally, avoid market timing at all costs.  The world is uncertain and the one thing we know is it is very difficult to predict the future.  You might be right to sell now and go to cash but you usually miss the subsequent low point when you need to get back in.  There are people out there who can successfully do market timing but there are many more who think they can, but who can’t. The stock market is very effective at getting investors to do exactly  the wrong thing at the wrong time. We buy at the top and sell at the bottom.  We should all learn better how to go sit quietly in our room. Best to establish an asset allocation that is just right for your needs and temperament and then….exercise extreme sloth. 

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