What to do NOW to Prepare for the Next Market Crash Everyone has his or her own definition of a crash. At Diem Wealth we define a crash as ‘a sudden dramatic decline of stock prices across a significant cross section of the stock market of 20% or more’. Since 1926 the S&P 500 has experienced 26 drops of 20% or more. 7 of these 26 drops were 30% or more. During the same period there have been 64 up years for an average return of 21.67% and 24 down years for an average return of -13.61%. Another way to put it is 2 out of 3 years the market has been up. Does that mean that after two up years we will have a down year? Certainly not! Right now we have had 2 up years and the media is talking like the market will go up forever. Many sources promoted by the financial media were also telling us the market was going down in March of 2009, the market’s bottom, and would continue downward.
The truth is nobody knows the direction of future market prices at any time. So What Is One To Do? The crash is not the problem. How investors process information put forth by the financial media and advisors is the entire problem. One must have 2 very basic rules. 1) Hold a globally diversified portfolio including a mix of equities and high quality short term fixed income investments. 2) Re-‐Balance the portfolio regularly ensuring the risk level remains prudent for you.So What Is One To Do? The crash is not the problem. How investors process information put forth by the financial media and advisors is the entire problem. One must have 3 very basic rules.
1) Hold a globally diversified portfolio including a mix of equities and high quality short term fixed income investments.
2) Re-‐Balance the portfolio regularly ensuring the risk level remains prudent for you.
3) Be absolutely sure of the risks you have taken. You should be able to measure your risk with a single number. Anything else is guessing!
Please feel free to contact me to request information on how to ensure you are getting the most return (bang) for your risk (buck).
Tom Diem CFP®, ChFC®