By John Grace
With the understanding that it makes all of the sense in the world to buy low and sell high every chance you get, there’s a high probability that a bear market can help you more than it hurts you.
We all know that cash is king. But when it comes to equity, all you hear is crickets. We can agree that no one wants to hear the old fish got away story.
Bless you, if you caught the big fish that made for a great meal, but we are all too busy to hear about the fish that got away. Who cares?
Sell in May and go away may be appropriate now more than ever. If so, that logic would be well applied to a bevy of things that have appreciated greatly in value.
The vast majority of the talking heads on television only recognize a bubble after it has burst. The fact of the matter is that every 7 year old on the planet knows that all bubbles burst 100% of the time.
In addition, they can see that the bigger the bubble the bigger the burst. Adults inhale all kinds of crack cocaine, which causes many to believe this time is different. Until it isn’t.
So design a strategy for moving out of risk assets into cash at a market high or you may live with regret, perhaps for longer than you can possibly imagine, that you missed the fish that got away.
“In a bubble like the one we are in now, where all financial assets — including real estate and bonds — are overvalued, there is only one safe haven: longer-term, risk-free U.S. Treasury bonds,” says economist Harry Dent of Dent Research.
Harry went on to say, “On the basis of the degree of risk, all other corporate or international government bonds can likely go down in value in a financial crisis, which can turn quickly from rising inflation to falling prices and deflation. The U.S. government will not default on their bonds, no matter what, as the bonds are essential to funding the government’s never-ending deficits and the U.S. is not a banana republic that international creditors could force into default.”
As this observer is fond of saying, “it’s not about the prediction, it’s all about the preparation.” Since savvy investors hate losses more than they love gains, now is the time for investors to establish strategies in advance that may limit losses.
Here’s great news for those who have cash. While investors can lose in a short-term bear market, those who are patient enough with their dry powder can invest in what may be years following a bear market (stocks, bonds, and/or real estate), you could well benefit from buying at a discount. The truth is that bear markets can help you create life-changing wealth.
Bear markets simply mean that equity prices are plunging, which only hurts investors with substantial assets that weren’t moved out of the way of the wrecking ball. It’s a simple concept.
We often forget that bear markets impact the wealthy far more than the middle class or younger investors.
“The wealthiest 10% of Americans own — wait for it — 89% of the U.S. stock market,” according to the Motley Fool. To better put things in perspective, the same source reminds us that in November 2001, for example, Amazon stock “was, at its worst, down 93% from its all-time high.”
Wrap your mind around how you would undoubtedly feel when one of your positions declined 93%, only to become one of the most valuable companies in the world 20 years later. Whether it’s life in general or any other success story, there is always an element of luck in the equation.
In your efforts to plan your financial success, now may be one of the best times to sell high, and keep your powder dry, in preparation for picking up shares, homes or stones on the beach when the tide is out.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.