Monday, October 13, 2014

Do You Have A Plan For When The Markets Crash?

I've spent 18 months laying out the case for why U.S. stocks were one of the most overpriced asset classes on the planet and why they were due for a massive correction. We've now begun the process of correcting downward in all the major indexes with many individual stocks down 20% or more.

Is this the big correction that finally removes the excess that has built up over the last three years?

Who knows.

The market has experienced many 5% ish corrections over the past few years only to wipe away the declines and immediately go on to new all time highs. That could easily happen again this time with markets finding their footing and blasting off further into the stratosphere of the absurd.

Trying to top tic the market should not be important to you. Whether the final top is S&P 2000 or S&P 5000, you are simply playing Russian roulette by adding money to U.S. stocks at these price levels. You can look real cool playing for a while, but like someone with a "magic roll" at a craps table, gravity always finds of way of returning to the world.

Now is actually the easy time in terms of investing because you're not really doing anything. All you have to do is stay off the train tracks and out of the way of the oncoming train. (As a quick side note, while I have been mostly adding cash to my portfolio I have been nibbling at assets such as silver, corn, wheat and uranium stocks over the past year which I have discussed on the site). However, while investing today is easy, psychologically, this is one of the most difficult times. Almost everyone you know is most likely throwing a party on the train tracks and waving you over to join.

If you have the ability to psychologically avoid the oncoming train, this is the time to begin preparing your strategy for what you would like to purchase after it arrives. Put a plan in place today for assets that you would like to purchase when they go on sale in the future.

For me personally, I plan on investing heavily in the commercial real estate sector when the froth is removed from that market. I've spent the last few years managing commercial properties and working for a large commercial real estate finance company preparing myself to understand where value exists and manage the buildings after they have been purchased. If properties fall by 40% (I believe many will fall more), then I have a plan in place for how I will begin to accumulate assets, where I will accumulate them and why.

I fully expect to begin buying before the market reaches a bottom. Believing that I have the ability to bottom tic any asset class is as naive as believing you have the ability to determine an exact top. The goal is to determine ranges of undervaluation and overvaluation. We are certainly in the latter today.

If you are interested in purchasing U.S. stocks, perhaps for the income stream they can provide through dividends, then think about what would happen if the P/E ratio on the broad U.S. indexes were to fall from the bubble levels of 26 ish today (Shiller CAPE) down to a more healthy range of about 13 (I believe they will fall more). Do you know what stocks you would purchase if there was a market decline of 50%? Do you know why you would purchase them?

Perhaps you would like to purchase government bonds of various countries around the world. Do you know what currency and interest rate level you would like to purchase the bonds? Do you have a plan in place to make the purchases if there was a panic sell off in a specific bond market or currency?

Most importantly, would you be able to psychologically enter a market after a major decline and begin accumulating assets on sale? After the train has arrived and everyone you know has seen their portfolios annihilated, if you go back up on to the tracks you will find a very lonely place. People will be shouting at you to get off as quickly as possible and move into safety.

Maybe this is the beginning of the real crash. More than likely, it's not. The U.S. stock markets are about 5% ish less dangerous than they were a few weeks ago. Unfortunately, the still have a long, long way to go before they reach a level that can be described as safe. Make a shopping list today and have a plan for when markets going on sale. Then welcome it with open arms when the crash finally arrives.

For more see: What If The Stock Market Fell & It Did Not Recover?

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