stock market crash 1929

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Yesterday, I discussed that I think the stock exchange could crash.

I am not predicting a crash – I simply think the odds of this happening in the next couple of years are higher than usual (logic below).

More notably, I think the probabilities are very high that, even if the market doesn’t crash, stocks will return far less over the next years than the double-digit portions they’ve actually returned in the previous 4 years.

In light of that view, numerous readers have asked why I’m not offering my stocks or even going short (betting on a crash).

After all, if I think there’s a ‘decent chance’ of a 30 %+ crash in the next year or more, would not this be a terrific opportunity to make (or at least save) some money?

That’s a perfectly sensible concern.

Here’s why I am not offering my stocks or going short the securities market:

* My profile is already well branched out. My savings are made up mainly of affordable index funds holding stocks, bonds, cash, and real-estate. If the stock exchange collapsed, this diversification would cushion the blow. It would likewise (I hope) keep me from panicking and selling near the bottom. (This is a genuine threat, one I occasionally caught early in my investing occupation.) I also have enough of my portfolio in money that, if the marketplace does crash, I’ll have the ability to rebalance into stocks at a much lower level.

* I never ever invest cash in the stock market that I need to use in the next 10 years. The stock exchange does crash sometimes. And the last thing you desire is to have to offer your stocks during the period when the marketplace is ‘crashed.’ If the stock market crashes permanently, or we get involved in a Japan-type situation in which stocks remain clobbered for decades, then, yes, I’ll be bummed I did not sell some now. But otherwise I expect any crash to be relatively short-term, just as the crash of 2008-2009 was.

* The outlook for various other property classes over the next 10 years is no more appealing than it’s for stocks (and, in some possible situations, it’s worse). If interest rates rise back to normal levels, bonds will get obliterated. Cash is making nothing. Real-estate is also expensive by lots of measures. So the last thing I want to do is leap from the pot into the fire.

* There seems an affordable likelihood that inflation will speed up eventually over the next decade, and stocks are an excellent hedge against inflation. Unlike bonds and cash, stocks are ‘real’ properties. They stand for an ownership share in a business whose company will adapt to inflation by raising the nominal level of rates, wages, and profits. Stocks do not necessarily do well in high-inflation environments (stocks were flat in nominal terms from 1966-1982 and dropped significantly after readjusting for inflation). However they do much better than bonds, which get demolished.

* Just because I think there’s a ‘respectable opportunity’ of a market crash doesn’t imply I’m highly confident there will be one. I’m never highly confident of any short-term market behavior. And I’d suggest that anybody who is highly positive about short-term market habits either does not have much market experience or is deluding themselves. I’m reasonably confident that stock returns will be lousy for the next decade – due to the fact that all the valid evaluation measures I understand of suggest that they will. But often things alter essentially and the old regulations no more use. And it’s certainly possible that it’s ‘different this time.’ (That, by the means, is why I am not 100% confident that returns will be crappy. If you ever fulfill somebody who knows what the market is going to do, please send them my method. I constantly presumed this individual existed, and I invested my decade on Exchange looking for him/her, but I never discovered him/her.)

* I’ve actually learned the hard method that market timing is very challenging and is usually an awful concept. It’s truly difficult to properly ‘time’ major market turnarounds. (I learned this as an expert during the dotcom crash in 2000, and my error expense me and my clients a fortune.) And it’s truly, really hard to properly time two significant market reversals in a row, which is what I’d have to do for it to be a clever concept for me to discard my stocks now. Specifically, if I offer now, and the securities market does, in fact, drop 30 %+ from this level in the next number of years, I’ll then have to identify the right minute to get back in. (Provided inflation, remaining on the sidelines permanently would be a catastrophe.) If the market drops, state, 25 %, it’ll be since things look so dreadful that it’ll appear like the market is going to drop an additional 25 %. And who wants to buy only to have the market crash another 25 %? If I set a difficult ‘buy’ floor at 30 %, at the same time, the market will no question drop 28.8 % then skyrocket, leaving me alone at the station as it rolls away.

* The market mightn’t crash. Rather of crashing over the next year or more, the market could increase an additional 10 % -30 % -50 % -100 % and afterwards correct the ‘imbalance’ by parking in location for 10-20 years. It’ll be psychologically extremely challenging for me to redeem in at a greater level after selling here, specifically if I’m still bothered with a crash. (And if I wait to buy in until I’m NOT bothered with a crash, I’ll be awaiting Godot.)

* If I offer now, I’ll have to pay taxes. Thanks to my indexing strategy, I’ve captured every point of the go up from the 2009 market reduced. When markets crash, I also buy more of them, so I was fortunate adequate to obtain some new stock in 2008 and 2009 at much lower levels than today. So if I offer now, I’ll have some capital gets taxes to pay. (I did, stupidly, ‘rebalance’ out of some stocks in 2011 or so, in part since I encouraged myself that we were experiencing a kind of sucker’s rally. That dumb-ass move has actually cost me cash between then and now and reaffirmed my conviction that market timing is idiotic. However, on the bright side, I’ve less embedded capital gains taxes to pay.)

* Strangely, the best thing that can occur for my long-term stock returns would be for the market to crash 50 % and afterwards remain crashed for 5-7 years. I reinvest dividends. So if the marketplace stops by, say, 50 % over the next year, and afterwards works from, say, DOW 7,500 for 5-7 years, I’ll get to reinvest 5-7 years worth of dividends at half the rate per share than I’m paying today. This will lead to my collecting twice as numerous brand-new shares over the next 5-7 years as I’ll if stocks remain where they currently are. Then, 5-7 years from now, when the stock exchange finally starts to recover, these new shares will act as a type of profile turbocharger, boosting my returns.

In short, the only thing I’m actually bothered with as a stock-market investor is a permanent crash. And if the securities market crashes permanently, it’ll likely be due to the fact that the United States has actually experienced a communist transformation in which all exclusive assets are seized or some various other calamity. And if that takes place, I am going to have bigger things to worry about than my stock portfolio …

SEE ALSO: I Think There’s A Respectable Chance The Stock Market Will Crash

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