As I write this, the stock market just finished its worst day in a long while. The Dow had its worst day in 8 months, falling over 370 points. The S&P 500 had a comparable loss in percentage terms, and the Nasdaq was even worse. Meanwhile, gold spiked up, and bond yields declined significantly.
The market decline was attributed to the latest news about Trump and his firing of Comey. Of course, whenever the market moves significantly, there are always reasons given by the financial media. We never really know for sure what drove prices up or down. It could just be that more people woke up this morning wanting to sell stocks as compared to those who wanted to buy stocks.
In libertarian circles, many are warning of a stock market crash. I have been one to caution of a possible crash, but I do not say it is imminent. I understand how hard it is to time the market.
There is a quote attributed to John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.”
While I am mostly a critic of Keynes, he was right on the mark with this quote if he said it. Regardless, it is something to heed.
The big question isn’t whether a stock market crash is imminent. We can ask the question, but nobody really knows. You don’t know how millions of people are going to act every day.
The big questions to be asked are as follows:
- Is the scenario of an imminent market crash plausible? In other words, is there a decent chance that it could happen?
- If it is plausible, are you prepared for such an event?
I learned about the permanent portfolio from Harry Browne. He was an advocate of protecting your wealth that you cannot easily afford to lose. In his last few years of life, he also hosted a money show. Whenever someone would ask him about some article or speech that they heard talking about some terrible event that was going to happen (dollar crisis, stock market crash, hyperinflation, spiking interest rates, etc.), Harry was always quick to turn the question around.
Instead of asking whether it is going to happen, ask yourself if you are prepared if it does happen. That is why he favored a permanent portfolio. It was meant to protect your financial assets in virtually any economic environment, or at least as well as anything that is out there.
I have been cautioning for a while that stocks could take a beating. It seems that they are in a bubble, but we don’t know how long the bubble will last.
So what if this big drop in stocks is the beginning of a new bear market? If that is the case, will you sleep ok at night? Will you know that you can wake up the next morning and not worry too much about your portfolio? Is it going to set you years back in your retirement if there is a crash?
The title of this post is, “Is Your Portfolio Ready for a Stock Market Crash?” I cannot answer this question. This is a question that each individual has to answer for themselves. But it is a very important question to ask.
I would encourage you to ask this question about any somewhat likely event.
- Is your portfolio ready for a default by the U.S. government?
- Is your portfolio ready for severe price inflation?
- Is your portfolio ready for rising interest rates?
- Is your portfolio ready for a deflationary depression?
- Is your portfolio ready for another financial crisis?
I avoid such scenarios as nuclear war and volcanic eruptions, not because they are impossible, but because it is so hard to prepare. But even with these scenarios, your investment choices could make a difference if you are not directly impacted by these events.
Look at your portfolio, and look at where you are most vulnerable. Ask yourself if you are comfortable with your investments given different scenarios. If you prepare, it can help you sleep better at night when events unfold.