A stock market crash of 20% or more is coming. We all know it. Of course, it might not happen until the stock market triples first. So what do we do about it? It’s hard to believe that the right thing to do is nothing at all.
From 2008 June 18 to 2009 March 9, the S&P/TSX Composite Index of Canadian stocks dropped by almost 50% (counting dividends). By simply selling at the beginning of this period and buying back at the end, anyone could have doubled the number of shares he or she owned. A market timer could have beaten a buy-and-hold strategy by almost 100%!
All the available evidence says that nobody can reliably predict the beginning or end of a stock market crash. The problem with guessing wrong is that you’re left on the sidelines watching stock prices rise without you. All available evidence says that you should stick with a good investment plan and just ride out stock market crashes.
I’ve known people who accept that the most profitable long-term plan is to ignore the possibility of stock market crashes. Yet they still pay attention to confident talking heads on television who offer meaningless predictions about stock prices.
More baffling to me is exchanges I have with people that go something like the following:
Investor: “Do you think stocks are overvalued? Is it time to get out?”
Me: “I have no useful insight into the near-term future of stock prices. I don’t believe anyone else does either.”
Investor: “Yes, I know that. But what do you think will happen? Maybe interest rates will go up soon?”
This ability for otherwise intelligent people to believe completely contradictory ideas is strange.
In any case, I’ve cast my lot with an investment strategy that makes no attempt to predict stock market crashes at all. I believe I’m on the side of the evidence, but I don’t expect this position to become very crowded with typical investors.