I live in the desert which means forecasting the weather is fairly easy. With an average of only eight inches of rain per year, you can pretty much plan on most days being clear and sunny. At the same time, as one who has personally had a prior home destroyed by a flash flood, I understand that those eight inches of rain tend to come all at once.
The constant question posed by investors, “Is a stock market crash coming?” is the wrong question to be asking. Worrying about a market storm has led far too many to miss out on the many days of beautiful sunshine the market has to offer. Assume for educational purposes only that a persons’ investment returns are tied to the Dow Jones market average. That average today stands at about 35,000. Prior to the virus-inspired market storm of last year the Dow was at a high just above 29,000. That represents a solid 20% increase in just 18 months. An investor could have missed out on a lot of great opportunities if they spent all that time on the sidelines worrying about the next storm.
This stock market pattern, like flash floods in the desert, has been repeated many times since its inception. An overall long-term upward trend is interrupted occasionally by sometimes severe storms. The proper question investors should be asking is not if a storm is coming but rather, “Am I prepared for the rare storm when it arrives so that I might fully enjoy the mostly sunny days in between?”
If you live on the edge of your finances, depending on every dollar you produce to fund your current lifestyle, then you are not prepared. If your debt and spending levels cannot be maintained for at least six months without any income, then you are not prepared. If you are overly concentrated in a small area of investing where the risk is too high, then you are not prepared. Correcting these weaknesses in your own finances should take priority over worrying about what Wall Street might be up to next.
As you plan for your investing future it is certainly wise and prudent to make changes along the way. Take profits where appropriate and rebalance as needed to stay within your goals. But avoid the temptation to panic, even when you see storms brewing. Like weather in the desert, in the stock market the good days have always outnumbered the bad and I expect that to continue. Remember, taking advantage of the many good days is the best way to weather the bad ones. Remain optimistic about the future while letting the storms happen when they may. The great wealth of this nation and its people was not built on fear of the storms but out of our ability to always see beyond them.
Worrying about storms does not stop them from happening, but it may prevent you from benefitting from the many days of market sunshine.