Is This The Crash?
The past few months, every time stocks or crypto go even slightly down you can pop onto YouTube and see a bunch of videos like this on your feed, trying to scare you about a crash…
You see the same thing in the news...
People have been hearing that stocks and crypto are overvalued or in a bubble for months or years now (because they have been).
Retail investors have psychologically internalized the notion that a crash is inbound.
So every small selloff becomes confirmation of that notion.
To put that another way, whenever the market goes down everyone loses their dang minds.
If I wanted to get more subscribers so that I could (eventually) sell them a newsletter, I'd lean into this and be pounding the table about a crash every time the S&P 500 drops by -0.1%.
"The sky is falling and we are all doomed," I would cry from my porch, my neighbors staring and wondering why I was covered head to toe in molasses.
Let's be real.
Messages of doom and gloom attract attention (and sell financial information).
Likewise, messages of naive optimism attract attention (and sell financial information).
And here I am, calling myself The Finance Daddy in my little newsletter for a personal finance website I started suggesting we all keep it cool…
Invest a little bit at a time (if at all)…
Make strategic bets if they look enticing...
And generally wait to see what happens with the market.
Because really there are only a few things that can possibly happen.
Once you have a battle plan for all of those possibilities, it makes life simpler and easier.
Knowing exactly what to do in any given situation and then having the will to stick with those plans helps you sleep well at night, on top of growing and protecting your wealth.
So let's walk through all the possible crash scenarios we might see and come up with a plan.
Scenario 1: A Market Crash Will Happen Soon
In this scenario, a crash is imminent! Oh no!
The market is massively overvalued and it’s going to crash in a matter of minutes!
Inflation is too high! The national debt is too high! The Fed is going to hike interest rates!
Oh no!
Whatever. Shall. We. Do.
Look.
There are 8 billion indicators and models that suggest the overall market is poised to turn down and produce sub-par returns for the foreseeable future.
(There are also a few that suggest that the market will probably keep climbing for a few months still, but that’s neither here nor there.)
Absent of some specific timely catalyst (like a government shutdown or pandemic lockdown), there is no way to know the exact date a crash will happen.
But the crash, when it happens, is going to be one of two types:
1. The V-shaped “Stab” crash, like the Corona Crash in March 2020 that the market recovered from within a few months.
2. Or the “Death by a Thousand Cuts” crash, like the dotcom bubble burst in the year 2000 that caused the market to hemorrhage for 4 years before it began climbing again.
Can you imagine what the YouTube video titles will be like when people lose money in the markets for four straight years?
I’d bet the new generation of traders would give up after the first few weeks, having wiped themselves out because they keep trying to YOLO call options on stocks that don’t make any money.
(If you don’t understand what that sentence means, I was mocking the degenerate gamblers who have infiltrated the stock market.)
Okay, so, those are the two types of crashes. It follows, then, that there are only two possible situations you could be in in this scenario:
You’re invested in the markets now.
You’re not invested in the markets now.
With two possible crashes and two possible situations you can be in, here’s what you should do given anything that could possibly happen:
If you’re invested now and the market undergoes either kind of crash, you can just… wait. You have the choice to do nothing, collect dividends, and invest a little bit of your cash in strategically chosen assets when there have been a lot of down days in a row. (This is called “cost-basis averaging” and it’s really good for making money in the stock market long term!)
You can also set what’s called a Good-til-Canceled “Trailing Stop Order,” which will provide you with a safety net, automatically selling your stocks if they drop a certain percent.
If you’re not invested and the market undergoes either kind of crash, you can just… wait. Buy in a little bit at a time. And gradually accumulate strategically chosen assets that will pay you dividends until you’re ready to be “risk on” and bet your life savings on growth stocks again (kidding… kidding… (or am I?)).
We can make a Punnett Square in Microsoft PowerPoint with these outcomes! (I love my job.)
Personally, I’m more of a fan of cost-basis averaging than doing nothing in most of these situations, but that’s because I have a long-term perspective to investing and I’m confident in the long-term growth of the global markets and the stocks I invest in.
I also don’t think it will be possible for someone to retire if they don’t invest in something, and right now equity (stocks and businesses) still looks more attractive than any other investment you can possibly make, such as bonds or real estate, even if a crash looks imminent.
(The only exception might be commodities or certain cryptocurrencies for now. But that’ll be a discussion for another post.)
[Quick Note: It’s also possible, if you’re dead certain that a crash is about to happen on some date, to protect or “hedge” against the downside by buying put options or buying an inverse ETF. But these are zero-sum bets, like purchasing insurance: It will either pay off, or it will lose most or all of your money. If you’re ok with losing money to have some insurance, keep the Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS) on your radar. You are guaranteed to lose all the money you invest in this asset long-term, except for a few brief flashes when there’s a significant crash and SPXS explodes upward.]
Scenario 2: A Market Crash Will Not Happen Soon
Look, crashes (let’s define them as a -20% drop or worse) will happen with 100% certainty in any market.
Why?
Because money chases money (or “Alpha” and “risk-adjusted returns” if you’re a nerd who prays at the altar of Smart Beta and MPT).
When people sell one thing to chase returns in another, the first thing loses value.
And when people pile into the second thing, returns diminish. Investors then gradually rotate into the next thing that’s rising.
And the cycle continues ad infinitum. Nothing sustainably grows forever.
So what if…
And hear me out…
What if all this talk of a looming market crash is overblown?
That…
And I’m just going to throw this out there…
That all this talk of a crash is meant to scare you into taking actions that benefit the people perpetuating narratives, such as the financial media or even humble hawkers of financial newsletters (a group of people that includes me!).
Fear is a pretty good motivator, after all.
Well, in this scenario, the decision to invest is going to be pretty simple.
If you are currently invested, you can do nothing. Or invest a little bit more at a time in strategically chosen assets.
If you are not currently invested, you can do nothing. Or invest a little bit at a time in strategically chosen assets.
(Are you starting to notice a pattern here?)
Over time, you will accumulate enough assets that are growing and/or paying you enough in dividends that you can feel comfortably assured that your wealth is, by itself, accumulating more wealth.
And unless your goals change or something fundamentally changes with the assets you’ve strategically selected…
You simply hang on and never sell.
Scenario 3: A Market Crash Has Happened and/or Is Happening
Oh you're still here? I was busy coating myself in molasses and screaming about the end of the world from my porch.
Look, here’s something most financial analysts, personal finance gurus, and uncles obsessed with timing the market don’t talk about…
When most people think about “the market,” this is what they imagine:
A simple, squiggly line that goes up and down based on something.
Doesn’t matter what that something is. One month it could be home foreclosures. Or the actions of central banks. Or a spreading virus. Or your horoscope. Whatever.
Even this is too complicated and scary (or expensive seeming) for almost half of Americans.
But in reality, “the market” looks more like this:
The market is a complex dynamic system composed of millions (actually, billions) of participants…
And each of them make individual decisions every moment that have tiny, nuanced impacts on the relative growth or decline of everything else.
If you take a snapshot of the market now, at this moment in December 2021…
You’ll probably notice that some markets have soared while other markets have crashed.
Because of the shakeup in Chinese regulations and fears about defaulting property developers in China having a “contagion effect” on the market, Chinese tech stocks have officially “crashed”:
In fact, if you look at individual segments of the broader market, there’s a bunch of stuff that has “crashed” already over the last few months: Electronic Office Equipment, Beer Brewers, Toymakers, and Airlines, to name a few.
And even though major market indices like the Nasdaq have reached all time highs recently, once you break up the index you’ll see a different picture:
Isn’t that nuts?
Even though the Nasdaq is having one of its best years ever…
If you removed just the 5 biggest stocks from that index, it would be having one of its worst years ever.
A lot of folks I know have been absolutely panicking because the tiny tech stocks they bought are collapsing.
So what can you do?
Well. Nothing. You can simply do nothing.
People don’t like hearing that.
But I ain’t “The Finance Person Who’s Going to Spoonfeed You BS That’s Going to Lead You To Make Irresponsible Decisions.”
I’m the motherfudging Finance Daddy.
And here’s something your daddy probably never told you but should have:
Doing nothing (at least for a little while) is a choice you can make, too.
Want to know how the Fed taper will affect stocks? Just wait a bit.
Want to know how inflation will affect stocks? Just wait a bit.
Want to know if crypto is a scam? Just wait a bit.
As long as you’re making good decisions and building your wealth overall at this moment, it’s not really going to matter much in 50, 30, or 10 years whether you invested the $2,500 you’ve managed to save in December 2021 or February 2022.
And if you’re dead-set on doing something rather than nothing, but you’re still worried?
Then go into the markets a little bit at a time.
Invest either once a month or whenever you see a big drop in the price of an asset you WANT to own regardless.
Listen…
Everything I've been talking about so far is meant to be a little nudge, to help motivate you to have a mindset shift.
I’m trying to encourage you NOT to worry so much, so that you don’t do anything crazy that’ll cause you to lose money.
“But what if I miss out on a big, explosive, once-in-a-lifetime chance to make gains?” I hear you cry from your porch, also covered head-to-toe in molasses for some reason no one can discern.
And to that, I have a simple reply:
Don't Worry About Missing Out
Almost all financial literature talks about “beating the market.”
But honestly, do you wake up in the morning and plan your days around beating the market?
Do you stare at yourself in the mirror, screaming positive affirmations at yourself like, "Today I am strong and proud and fierce and I will outperform the average annualized returns of an arbitrary index of stocks"?
Even if you're a day trader…
Probably not!
If you’re making more money than you had, be happy and keep up the good work.
But are you one of those people who wakes up in the morning, kicking yourself for:
Not buying Facebook, Amazon, Apple, Netflix, Microsoft, or Google stock 1, 3, 6 years ago?
Not buying or investing more into 1, 3, 6 years ago?
Not launching that killer business idea you had that you just saw on Shark Tank?
Then you might also be one of those people at a casino who won big on a roulette spin and gets upset “because [you] should have bet more.”
That is, foolish. And maybe suffering from a serotonin deficiency.
Here’s the secret to beating the FOMO (fear of missing out) blues:
Make good decisions that will make you wealthier right now. Today and moving forward. Even if it includes waiting a while for a new opportunity to arise (they always do).
As long as you can look at the numbers in your bank account and feel good…
Be happy and keep up the good work.
As long as you can look at your investments and not worry…
Be happy and keep up the good work.
As long as you can take a step back and look at the job you’re doing, the things you own, the money you’re making, and it’s all more than what you had before?
You’re doing great. Be happy and keep up the good work.
And if you’re still not happy? Stressed? Worried? Wringing your hands with anxiety?
Come up with a plan, and execute. (And maybe chase a beer with some Xanax, you worrywort.)
The moment you make a decision about what you’re going to do and you follow through with it…
You will immediately start feeling better. Even if it means just… doing what you’re doing now and waiting for a bit to see what happens.
If you need help coming up with a plan?
I wrote this one that I think is pretty good.
And my mentor/one of the owner-investors of DIYwealth wrote this one that I think is really good.
No matter what, though, don’t worry so much about a market crash.
As long as you take proper precautions or have the right plan, you will be fine.
