What to do if you think the market's about to drop
By Gary Silverman, CFP®
Okay, today I’ll wrap up the “getting out of the market before everything goes to hell in a handbasket” discussion.
The first week, I looked at the difference between my type of investing and market timing. The portfolios I build or recommend are designed to drive through economic storms. Market timers try to dodge those storms.
Last week I looked a bit more closely on what it takes to dodge. I came up with two very big problems with this method of getting out before the next market debacle: getting out too early or getting back in too late.
Behaviorally there is an additional issue: You’ll know that a major market drop is about to occur, but you really don’t know. That’s predicting the future. If you’re good at that, get out of the markets and go to the horse track instead.
I’ve talked, explained, defined, but I haven’t told you what to do yet. First, the obvious: Since I build and recommend portfolios that do strategic investing that are designed to ride out the storm, I really do think that’s the best way to do things. But there are several caveats involved.
First, it assumes you have time to ride the market down, back up to where it was before the drop, and past that to get a gain that makes all of it worthwhile. If you don’t have the time, you shouldn’t be in the stock market (or any other volatile investment) in the first place. If you have less than five years until you’re going to spend a chunk of money, that chunk should not be in the market to any significant extent. So, if you’ve got an account that’s supposed to pay for your kid’s college in 2020, get the majority of your money out of the market.
Second, it assumes you have the guts to ride the market down. I don’t mean this as an insult. I don’t have the guts to ride the Shock Wave roller coaster at Six Flags. I have the courage, but my guts will do some really messy things if I ride it.
When the market drops precipitately as it did in 2008 or over an extended time period like 2000-2003, a lot of otherwise reasonable, logical, brave folks threw in the towel. This is where you have to be very honest with yourself. If you won’t be able to stand seeing that portion of your portfolio that’s in the stock market plummet 40-60% without selling in the process, you shouldn’t have that much money in the market. Instead, decide what part of your portfolio you can stand to see drop off the cliff without capitulating and get the rest out.
For those of you who have the time and the guts to ride through the markets’ ups and downs, keep it up. Yes, it will get bad sometimes, but it will also get good again. In the end it’s quite worth it. Kinda like life.
This article was published in the Wichita Falls Times Record News on January 15, 2017.