If you believe the market is going to crash there are a few things you can do to protect yourself. You can go to cash which has become more attractive (online savings accounts such as Ally are now offering 2%), put money in gold or invest aggressively in funds designed for a full bear market. But do I think you should do any of those things? No. There is a big difference between thinking the market will crash and knowing.

Investors are always trying to time the market. Consider the election of Donald Trump in 2016. During the election, news outlets poured in data and projections that a Trump presidency would ultimately result in a major downturn in the markets. In fact, CNN Business wrote:

If Donald Trump wins the election, U.S. stocks (and likely many other markets overseas) will almost certainly tank.

How big of a drop? Forecasting firm Macroeconomic Advisors predicts an 8% fall in the U.S. A new paper out Friday from the Brookings Institute projects a 10% to 15% nosedive.

Those who moved to cash and sat out on the sidelines missed one of the greatest bull run-ups in recent history. How’s that for “timing” the market?

Trump Rally
S&P 500 10/3/16–12/31/17

With a rocky 2018, it seems every week a new story comes out that “this time it’s different”. Looking back we understand staying invested was the wise choice. But when all signals are pointing to a market downturn and friends are family are telling you they’ve gone to cash, staying invested is extremely difficult. Let’s say you could time the market. Even then, do I think you should move to cash? No.

The biggest issue with moving to cash is you have to be correct twice: getting out of the market and getting back in the market. Once out of the market, people have a tough time getting back in. It’s never the right time, we have another “this time it’s different” story, or things just don’t look right. So the viscious cycle continues and people wait on the sidelines, missing market growth.

Take a look at this chart from the 08–09 recession. If you managed to sell out right at the peak (which investors rarely do), when do you get back in? Would you have the insight to get back in the market at the bottom (selling high and buying low — the ultimate goal of any investor)? Doubtful, considering most news headlines continued to pour in data on declining markets and a bleak future. Stock market news by Zacks back on March 2, 2009:

U.S. markets pointed to another big drop on Monday with the Dow futures losing 150 points, or 2.13%, to 6,902. Standard & Poor’s 500 index futures sank 18.20 points, or 2.48%, to 716.00, while Nasdaq 100 index futures lost 24.75 points, or 2.22%, to 1,092.25. Since October 2008, stocks have lost $10 trillion in value and since the beginning of the year as many as 33 S&P firms have cut their dividend payouts.

Stock Market Drop
S&P 500 1/2/07–12/26/2011

Little did investors know (and for that matter most professional analysts) that a recovery was right around the corner. Even as markets picked back up, it was still a blood bath and nobody was ready to jump back in. Research provided by Allianz Global Investors proved just how costly it can be missing only a few days of exceptional market returns:

Allianz Global Investors provided an example of just how much investors can lose out in just a few days. The Allianz economic research and strategy team looked at the period from 1973 to the end of 2014, comparing four different approaches to investing in the U.S. stock market. Investors who missed the three biggest days of each year see their gains go down dramatically.

In the first approach, $100 is invested on the first day of the year and another $100 dollars added at the start of each year thereafter. The total return over the four decades was $52,251.

In the market-timing approach, if an investor invests the same $100 at the start of each year but misses the top three days of the year, the total return was $2,953.

The best return of all came from investing $100 on the day of the lowest index level of the year — the best day of the year to invest — and adding $100 on the lowest-index-level days of subsequent years. That approach netted a total return of $54,355.

So as markets continue a downward spiral, I encourage people to refrain from making emotional decisions moving to cash. As long as a financial and investment plan has been implemented for both rising and falling markets, emotional selloffs are unnecessary and will ultimately be harmful.


Alex Okugawa

San Diego Financial Planner. I write about financial planning topics to guide families in making a greater impact with their wealth.

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