Your Personal Period of Return™ is the time between your initial investment and the date when you will have to start drawing on that money. If your Personal Period of Return™ played out during the crash-prone era of 1896-1945, your entire investing life would have been an endless cycle of crashes and recoveries.
Curiously, many investment charts ignore 30 years of this time period and instead start in 1926 with the S&P 500. This omission ignores the more definitive Dow Jones Industrial Average, which is the longest dated set of financial data anywhere.
No one gets to choose when their Personal Period of Return™ takes place or what the forces of the market will produce during that time. Adding a crash management plan is a strategy that helps investors attempt to gain more control over their Personal Period of Return™, and potentially mitigate parts of large losses (drawdowns) during crashes and resist being at the mercy of the markets, like investors who only buy and hold.
Investors should consider the following six elements of crash management.
1. Understand the Stock Market Crash Management Suite
The following truths are the foundation of strong crash management planning:
- Historically, after markets go down 20 percent it has been significantly more likely that markets will crash.
- Historically, it has been possible to avoid parts of some crashes, though it is not possible every time.
- Squire Asset Management research has found that there have been a number of tactics that led to better results than buy and hold by avoiding large drawdowns and the asset devastation that they cause. With that said, it may or may not be possible in the future.
- It is possible to know the difference between a correction and a crash, and to invest accordingly for each.
2. Keep Enough Cash on Hand to Buy Low
Don't buy high. Put your money to work by investing when prices are below recent or all-time highs. This is only possible for investors who keep enough cash on hand to buy stocks when they are low. Many investors have all of their money invested all of the time and thus miss opportunities for good buys at the bottom of crashes.
3. Use 2 Types of Dollar-Cost Averaging
Dollar-cost averaging, like the kind that takes place in your 401(k), (Type 1) makes it possible to buy more of a stock when it is less expensive on a regular basis. Dollar-cost averaging outside of 401(k) s (Type 2) should be done more deliberately and systematically, and not necessarily at set time frames. The idea is to buy when the market is down 5, 10 or 20% or more repeatedly.
3. Ditch Bad Investments for Good Ones
For your winners, instead of buy and hold forever strive for better performance by recognizing tops or bubbles (link) and by exiting investments that are underperforming or that have reached peak valuations.
For losing investments Investors Business Daily has recommended in the past that investors sell if an investment goes down 7 or 10%. Why? It’s not doing what you wanted, which is going up. We more specifically have targets based on industry because they differ. Selling a tech or biotech company down only that little would be ill advised. They can go down 20-30% at times and that is a completely normal part of their growth pattern.
4. Remember: Buying Low, Selling High is Not An Attempt to Time the Market
Benjamin Graham, Warren Buffett’s mentor, is often misquoted as advising not to try to time the markets. In reality, he advised investors to resist the urge to jump at every fluctuation, but he certainly recommended “buying in low markets and selling in high markets.”
5. Don't Go it Alone
Do not act without professional help. There are too many moving parts. Even savvy investors may know when to get out, but they don’t always know when to get back in and can miss significant rallies because of this.
6. Get the Right Help
A financial professional with stock market crash management expertise may be able to help more than investors or advisors who promote only buy and hold strategies.
Use a series of questions to vet advisors based on their credentials, their fees and their philosophy. Many advisors stick to the industry gospel of buy and hold, but preparing for a crash requires proactive steps to identify impending danger and get out of the way before it arrives.
7. Develop a set of Pre Crash Battle Tactics
There are disaster preparation plans in nearly every other endeavor the world over for Tornados (Fujita Scale and Doppler radar), Hurricanes, Earthquakes (Richter Scale), Tsunami Warning Systems, Wildfire Alerts, Green Yellow and Red Flag systems at the beach, and Terrorism alert levels. Yet in the financial Industry, when talking about our financial livelihood, they recommend we simply ignore loss, hope for the predicted recovery and essentially do nothing.
It makes ZERO sense.
Your retirement may depend upon the right philosophy.
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