How Do You Prepare For A Downturn When You Have Never Experienced One?

One of my favorite pastimes is investing.  I love to follow the financial news, watch the ticker on CNBC and Yahoo Finance, and tune in daily to Mad Money.  As a 28 year old, who started investing when he was 21, the last 7 years have been nothing but an ever increasing stock market.  You never got hurt buying the dips and every quarterly statement appeared with a higher value than the previous one.  With only a handful of companies driving the majority of returns and the constant wonder of when the current bull cycle will change course, it has me wondering when the market will turn and how someone like myself will react who has never experienced a large decline.  A couple things jumped out at me to prepare.

  1. Don’t fear a market decline, embrace it.

This seems like the simplest mindset.  As a young investor, in many respects, I want the market to crash and become much cheaper so I can put money to work at lower prices, but will I have the sense to do so or think I can buy-in when the market is even lower.  As the saying goes, the stock market is the only market where people are angry when prices decline.  This sounds all well and good, but it begs the question of whether someone will be able to maintain course once the shit hits the fan.

2. Move to cash, the market is going to crash any day now.

If you read the maniacs like Dr. Doom and Gloom Marc Faber, or Peter Schiff, or James Rickards or any of the other perma-bears, you have expected the market to crash and the world to end every day for the last 7 years.  It hasn’t happened and if it did, you would wonder why they think gold and silver will be the default currency when the end of the world comes, instead of food and water.  Despite the warnings, it makes zero sense to me stop investing when I have a 50 year time horizon and history is on my side with the greatest returns coming from stocks.

3. Keep investing and try to time the market when it inevitably declines.

Wouldn’t this be an obvious solution?  However, I don’t think that I have the uncanny ability to pick the top and bottom of the next crash.  So many people got out during the last downturn and only got back in after missing out on years of gains or are still under invested or out altogether.

When I ask myself this question, it makes indexing and dollar cost averaging into the market with a long-term investment horizon all more likely to be the answer.  It is extremely difficult to pick the best stocks and even more difficult to pick best entry points.  Why not remove both decisions and focus solely on an asset allocation that fits your age and time horizon and maximize the amount you can save each week or month.

I still love investing in individual stocks and own companies like Facebook, Netflix, Shopify, and Mazor Robotics because I think they can outperform the market and it is my main passion and hobby.  However, I have thought more and more about this portfolio as my side portfolio or gambling fund as it still allows me to “play” the market and do so very seriously without it encompassing the majority of my portfolio.

The majority of my investments today are in one fund: Vanguard Global Stock Index.  It provides me with the ability to dollar cost average each week and the ability for me to welcome each downturn with open arms.

If you have thought about this question and have any ideas to add, I’d love to hear them.

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