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The “Buy the Dip” financial news teleprompter readers and the 30-year-old portfolio managers who have never seen a market crash are pounding the table that stocks are going to the moon. Market veterans and “Hey Boomer” professionals have seen this show before. In 1987, the DJIA plunged a stunning 22% in one day. Today, an equivalent drop from the recentl all-time high in the venerable index would be almost 9100 points.
From 1929 to 1932, the stock market plummeted a stunning 83%, and many lost everything. That debacle caused the Great Depression, which ended only when we entered World War 2 in 1941.
From 2007 to 2009, during the height of the mortgage and real estate collapse, which brought us dangerously close to another depression, the market dropped a massive 57%. When stocks finally bottomed at an ominous intraday low of 666 on the S&P 500 on March 9th, 2009, we placed the floor for the longest bull market in history, which ended in January 2022.
So, where do we stand now? We are on the precipice of a much more significant decline than we have seen in years, with all major indices trading at all-time highs les than a month ago. With the potential for any more interest rate hikes unlikely and the first one as early as September, the “higher for longer” mantra is likely to end soon.
One positive is that consumers and businesses are generally in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the last few years, and the financial system isn’t teetering on the abyss as it was globally in 2008 when Bear Stearns and Lehman Brothers collapsed. To avoid a similar fate, Merrill Lynch had to be bought by Bank of America.
One thing is for sure: If inflation moves higher again, the wars in the Middle East and Ukraine expand, and our crushing national debt, now $35 trillion, continues to spiral out of control, the path of least resistance will be down. Investors should consider some crucial items now, as they may have to prepare for the worst.
Start building a cash stash now
Savings represent money that is otherwise idle and not being put at risk with investments or spent on consumption.
Matching current losses against gains, even if they are short-term, makes sense to help build up a cash supply. The proverbial dry powder may come in handy down the road.
Close out any margin positions immediately
Margin is the money borrowed from a broker to purchase an investment.
When times are good, using margin loans to buy more stock is a bad plan for individual investors, especially when those margin positions are high-volatility momentum stocks. If the market collapses, a highly leveraged investment account could be destroyed.
Gold and Silver still make sense now
Gold is the most popular investment of all the precious metals.
As we have recommended for years at 24/7 Wall St., a gold position helps mitigate the downside. As we noted recently, the precious metal did return to all-time highs, but it could explode higher in a market crash.
Make sure investments reinvest in more shares
Dividend reinvestment is a great way for an investor to grow wealth steadily.
Ensure that all the dividend-paying stock and bond mutual funds in personal and retirement accounts are coded to reinvest all capital gains and dividends if possible. This allows you to buy more shares when prices are hit hard. The third quarter is well underway, and many stocks and funds pay dividends on a calendar quarterly basis.
Real Estate can help soften the blow
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative.
Consider real estate if you have the good fortune to come into a windfall, like an inheritance or something similar. While mortgage rates have increased over the last two years, the 30-year fixed rate has risen as high as 7.25%. However, it has fallen back to 6.12% for a 30-year FHA mortgage, and while still reasonable on a historical basis, it’s the highest since 2008. Owning cash-generating passive income rental property makes sense now.
Pick stocks carefully now
Conservative stocks delivered a positive annualized return every decade, beating their speculative peers in many periods.
If you need stock ideas, look at highly conservative sectors, which are not affected as badly by even the worst-case scenarios. In other words, look at companies that provide goods and services that are needed all the time, such as utilities, telecommunications companies, consumer staples, and real estate investment trusts.
U.S. Treasury bonds still look great now
Treasury bonds include a range of debt securities issued and backed by the US government.
Sell high-volatility stocks and look at the short end of the Treasury market. The 2-year note, like all Treasury debt, is guaranteed by the full faith and credit of the United States and yields a solid 3.70%. One-year Certificates of Deposit yield as high as 5.25%, and money market savings accounts, FDIC insured up to $250,000, yield anywhere from 4% to 5% with daily liquidity.
Last but not least....
The Great Crash is mainly associated with October 24, 1929, called Black Thursday, the day of the largest sell-off of shares in U.S. history,
2022 was the worst year for the stock market since 2008, and while 2023 and so far in 2024 has been a continued massive bull run, led by the Magnificent 7, that are still up smartly this year, trouble is likely brewing, especially in the tech-heavy Nasdaq. While not a subject investors like to consider, given the recent market action a continuing steep drop is becoming increasingly possible.
Remember that even the most challenging human history and investing events have eventually been overcome. Whether healthcare-related, war-related, foreign geopolitical or domestic troubles, or other issues that have combined to cause market sell-offs, they eventually end. It makes sense to take advantage of the recent massive gains in stock prices and shift to higher and safer ground.
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