Markets Are Cyclical
The stock market, like most all markets is cyclical. This just means that the market operates in cycles or repeated patterns. While individual stocks diverge and have their own growth/loss the market as a whole will do the same thing over time. There’s a time where growth is obvious and there is a lot of money to be made, but there is also a time to get out before it’s too late. So the question is, with the recent volatility of the market, which part of the cycle are we in now?
Looking At The Charts
Looking at most all stocks charts in the past 10 years, it’s pretty clear that we have had tremendous growth across the board. You can look at the tech sector, energy, real estate, small cap, large cap, new businesses, old businesses, they’ve pretty much all gone up with a few exceptions. If you’ve been investing in the stock market for a year or more, you’ve almost definitely made money. The problem with all this growth is that it can only lead to one thing, a crash.
The Impending Market Crash
Whether you believe it to be now, months from now, or even years from now, accompanying every top of the charts growth is a loss. Sometimes it’s happens really quickly, other times it’s a slow loss over several months, but denying that it will come eventually will only lead to bigger losses. On the other end of the spectrum, being so afraid of a crash that you never invest in the market will lead to loss as well, inflation. Keeping your money in cash is a different type of loss, but over time inflation will eat away at your once enormous pile of cash.
How Much Should You Be Investing?
If you invest all your money all the time, you’ll have extremely high gains, until you lose those gains in market crashes. If you invest nothing, you can never gain. That leads to the best investment strategy, somewhere in the middle. Exactly how far you lean to one side or the other will depend greatly on your risk tolerance, goals, industry, and many other factors, but you should always have some money set aside for a crash or correction.
How To Profit From A Stock Market Crash?
By keeping some of your capital in cash, you allow yourself to buy more shares at a lower price if the market falls, but you’ll still experience the gains from your current investment if the market goes up. Buying more shares after a crash is how you can turn a 50% market loss like we have in 2008/2009 into a massive gain. The thing to remember is, accompanying every market crash is growth. Depending on the size of the crash it may take weeks, months, or even years to recover, but the market has recovered every time.
What Should I Do Now?
The market crash seems to be getting close, so keeping a bit more in cash is a good idea for now. That being said, the holiday season is approaching which could lead to temporarily inflated prices (more short-term profit). If you are not in the market at all, investing 10% to 25% of your intended investment capital is a good start. If you feel comfortable, going as high as 50% is still a safe bet. When you chose to go over 50% invested, you are making a bet against a near-term crash. In the end it’s up to you, but most experienced investors agree there is a crash coming, it’s just a debate on when.
What If I’m Already In The Stock Market?
For those that might be stuck in an investment they are currently at a loss on, I have one question for you: Is the company you invested in a company that you believe in long term (10+ years)? If they are, never take a loss on your investment. If they are truly a good company, in the long-run you’ll earn profits. You may laugh at that or think it’s a ridiculous policy that could never work, but it’s my primary investing strategy and has never failed. The key part of any investment is choosing high quality companies that will stay competitive for years to come. If you do that, regardless of when you buy, you’ll almost never lose money in the long run.