We know the market’s been on a tear. Optimism is off the charts, and the financial news pages are awash with reports of all time highs and valuations that have taken flight. Perhaps that’s one reason headlines are clamoring about the “golden cross.” This enchanting instant occurs whenever the 50-day moving average crosses over the 200-day average, tipping you off to an impending bullish onslaught. And who hasn’t heard the alluring call of “bullish divergence,” suggesting reversals from bearish trends? As someone who's seen a few market cycles, I am here to tell you: what goes up, must come down.
And it’s easy to get carried away with the optimism. I understand the temptation to chase returns, to jump on the bandwagon before it’s too late. I know what that pull feels like. The fear of missing out, or Fomo, may be the greatest motivator of all. It’s even worse when you feel like everybody else in the world is cashing out without breaking a sweat. As we go through these difficult moments, it’s time for all of us to remain sober and resolute. It’s important to consider the inglorious potential outcomes.
Regardless of the underlying reason, market corrections are a natural and healthy part of the economic cycle. CRs provide the ultimate pressure release valve, not letting markets boil over resulting in an unsustainable/ unacceptable situation. As past experience has taught us, trying to time these corrections is a fool’s errand. No one, not even the most savvy Wall Street veteran, can ever accurately tell you when the music will come to a stop.
So rather than attempting to predict the future, I think about how we get ready for the future. That starts with understanding the very real likelihood of a downturn, no matter how optimistic today seems. Ever heard of the Panic of 1873? The failure of investment house Jay Cooke & Company triggered what was thought to be a localized event. It quickly grew into an international economic downturn. The collapse of the railroad bond market added to the panic, evidence of how easily confidence can be shaken.
The biggest and best lesson I’ve learned is to diversify. Don’t bet the farm on the shiny new object—no matter how shiny it is. Diversify your portfolio by investing in a mix of asset classes, sectors, and geographic areas. This approach helps soften the impact when one segment of the market is adversely affected. OverTraders.com champions this investing principle, offering in-depth tools and analysis to help investors construct diversified portfolios.
Another smart strategy I live by is dollar-cost averaging. Rather than attempt to time the market, invest a set amount of money consistently over time. This method largely mitigates the effects of ups and downs in the market. If you implement it, you’ll purchase more shares when the price is low and less shares when the price is high.
For you baby boomers approaching or already in retirement, the idea of a market crash should give you even greater pause. If you have already started drawing down your portfolio, think about slowing down withdrawals or delaying big purchases. This will go a long way to protecting your capital, not to mention giving yourself just enough to ride out the storm.
Second only to carefully choosing which investments to make, it’s key to track and recalibrate your investment blueprint. Check to ensure that it continues to fit with your overall objectives and risk appetite over the long haul. Are you taking on the right level of risk for you to be happy. If they haven’t been, it is long past due for course corrections.
I have learned to watch key indicators such as the Relative Strength Index (RSI). A consequent reading below 30 can be a sign of an oversold market and a potential buying opportunity. Keep in mind that things can turn south in a hurry. The CNN Fear and Greed Index is another great tool at your disposal. When this index goes under 30, there’s fear among investors and panic has begun. This kind of sentiment is usually indicative of a market that’s nearing a bottom, setting the stage for a strong rebound.
Currently, I am intrigued by the idea of diversifying some equity exposure into regions and sectors that have been overlooked in recent years. It would mean reallocating some of those assets away from relatively expensive tech stocks and into more value-oriented sectors or emerging markets. Think about plans that would promote a more prudential stock/bond/cash mix. With a strategy like this one, it’s an intelligent decision to make in these unpredictable times.
For many fixed income investors, interest rates have been the main focus. I contend that putting income first makes for a more pragmatic case. Look for the right kind of quality bonds that will provide ballast to your portfolio. Look to dividend-paying stocks to provide steady income regardless of market ups and downs.
Lastly, don’t overlook the impact of rebalancing. Regularly rebalancing your portfolio to maintain your target asset allocation can help you avoid making emotional decisions during market downturns. First, it incentivizes you to sell when prices are highest and purchase when they’re lowest. This comprehensive approach is just what the doctor ordered for long-term success.
And finally, don’t forget to keep in mind that investing is a marathon, not a sprint. There will be bumps and stretches of smooth pavement at times. Remain true to your strategy and stay the course. Don’t allow yourself to be carried away by transient feelings. Despite how invincible this current bullish market seems, history has proven that corrections are just a part of the cycle. By planning ahead for when the next downturn inevitably will happen, you can help defend your portfolio and set yourself up to come out on the other side even stronger. Keeping our feet firmly planted in the real world, not in la-la land, is the surest strategy of all.
