A Recession Hits The Unprepared Hardest
A new investor saves up a few thousand dollars in cash over several years. He learns about the stock market, asset classes, options, and shorts. He diligently researches how to have a well-diversified portfolio. When he finally feels confident enough, he puts his entire life savings into the stock market. Within one month of investing from the peak in October 2007 until their closing lows in early March 2009, he watched as the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 all suffered declines of over 50 percent. He watched the worst stock market crash since the Great Depression. The fear and pain he felt as his savings started to disappear in a sea of red caused the young investor to sell it all and take the loss.
He bought at the top and sold at the bottom.
The investor learned a hard lesson: WHEN you invest is just as important as HOW you invest.
The man rebuilt his cash reserves and patiently waited like an alligator in the shallows of the river bank for the market to come to him. That moment came in 2020 during the crash because of the global pandemic. When the blood in the water turned everything red, he put all of his cash into the companies he had been eyeing. He went from losing almost half his life savings to more than doubling it in just one year.
Timing is EVERYTHING
The bull/bear cycle is real and predictable. When we speak of predictability, we mean that it’s not a matter of IF or WHEN a market crash will happen— it’s that we can safely predict that a market crash WILL happen. Knowing that a market crash will happen at some point takes the element of fear away, and it simply becomes a game of patience and discipline. It’s the same strategy we see in the animal kingdom by ambush predators. You lay and wait for your moment, and when that moment comes, you strike without hesitation. There are many things to consider before using this strategy, including time horizon and available capital. A person in their 60s, for example, might not be willing to wait eight to ten years for a crash in the market. This strategy requires access to capital ready to be deployed during these downturns and knowing when to exit winners and losers in your portfolio.
As you can see from the S&P 500 chart, crashes happen at fairly regular intervals. We also see why time horizons make a big difference in whether this strategy is right for you. If you had planned to buy and hold a company for 20+ years, a quick look at this chart shows you that crashes tend to have less of an effect on long-term holders. Holding on for dear life over several decades is a strategy, but it’s not the best way to go. It’s much better to be able to capitalize on a recession rather than just barely surviving it. If you’re several years into a bull market, you want to start building up a cash reserve. Have a stash of capital ready to be deployed to take advantage of these downturns. Be aware of world events and news that may signal a downturn in the market. As an investor, you should know the specifics of the sectors in your portfolio and how certain events may affect them.
Black Swan Events
A black swan event (BSE) is an entirely unpredictable event far beyond normal expectations from a situation and has the potential for severe consequences. BSEs are rare, severe, widespread, and generally unpredictable. The recent pandemic is an example of a BSE. A BSE is simply a buy signal for those with cash reserves who have been patiently waiting for such an event to occur. No one wants a recession to happen, but being prepared for when they happen is what separates the responsible investor from the irresponsible. Knowing how to survive the Next Great Recession requires disciplining yourself and forming a plan before the recession hits. For more information, we recommend the following e-book.