Advertisement
investing

Investing Rule No. 1: Don't Believe Doomsayers

There's no such thing as a stock market psychic, but there are ways to protect yourself from the next disaster (and from your own misguided tendencies).

Here’s when the next stock market crash will happen …

Tell the truth — when you saw this declaration, did you continue reading because you suddenly wanted to drastically rearrange your portfolio or take all of your money out of the stock market? If so, you can relax a minute. This post isn't designed to make you sound the alarm and get out before another crash happens. And we're not going to suggest that you go all in before the next boom happens either.

Advertisement - Article continues below

In fact, this post isn't intended to do anything of the sort. Instead, it’s to help you understand three important tenets of successful investing:

  1. Sound investors always ignore the doomsayers.
  2. You can (and should) protect your investments from the market volatility without taking extreme measures.
  3. Excessive loss aversion can force you into poor financial decisions.

Why Psychics Make Bad Investors

There's good news and bad news if you're feeling desperate to know when the next stock market crash or correction will happen. The bad news is that we have no idea when it’s coming. And no one else really knows either, no matter how far they go trying to convince you they've figured out some deep, dark market secret.

We'll get to the good news in a moment. In the meantime, here are four great reasons to ignore the stock market doomsayers.

Advertisement
Advertisement - Article continues below
  1. These stock market prophets of doom are always trying to sell you something. Always.
  2. Over any protracted length of time, the markets are much more stable than the doomsayers want to admit.
  3. The doomsayers are always wrong, at least over the long term.
  4. If you accept the counsel of a doomsayer, you’ll be making a decision based on emotion, which is always a bad idea.

The Good News About Market Uncertainty

Now for the good news and the most important knowledge to take from this article. You can prepare your investments for the next stock market crash or correction, even if you don't know when it's actually going to happen. You don't need certainty to be a successful investor. The key is steering your portfolio effectively as the market moves between its boom-and-bust cycles.

Advertisement - Article continues below

Here's what you can do to protect yourself from the next market disaster.

  • Always make sure your portfolio is highly diversified across asset classes, industries and countries.
  • Examine your portfolio to assess if you have the appropriate amount of equity exposure for your personal goals and for your risk tolerance level. You can gauge this by asking yourself what would happen if your portfolio's value were cut in half. If such a loss would greatly threaten your investment goals or force you to sell, then you most likely should not have 100% of your portfolio in the equity markets. That’s because a drawdown of 50% is very possible for a portfolio fully invested in equities.

Loss Aversion and Poor Financial Decisions

One of the most important things you need to understand about anticipating a market crash is the profound effect that intense feelings of loss aversion can have on your decision making. Loss aversion can be described as follows:

The idea of losing a (supposedly) valuable asset is sometimes so unpleasant that it can lead to poor economic decision making. Loss aversion can make you irrationally committed to the status quo, sometimes to the point where inaction or stubbornness can lead to the very financial devastation the behavior was intended to avoid.

In other words, loss aversion can turn the possibility of financial damage into a self-fulfilling prophecy. You can avoid this dismal fate only by remaining vigilantly self-aware at all times and making wise, calculated financial decisions, not ones based on emotion.

So, at the end of the day, the question isn’t whether or not you know when the next market crash or correction will occur. It’s whether or not you’re adequately prepared when it does.

About the Author

Paul V. Sydlansky, CFP

Founder, Lake Road Advisors, LLC

Paul Sydlansky, founder of Lake Road Advisors LLC, has worked in the financial services industry for over 20 years. Prior to founding Lake Road Advisors, Paul worked as relationship manager for a Registered Investment Adviser. Previously, Paul worked at Morgan Stanley in New York City for 13 years. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN). In 2018 he was named to Investopedia's Top 100 Financial Advisors list.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
17 States That Will Gain or Lose Electoral-College Votes After the 2020 Census
Politics

17 States That Will Gain or Lose Electoral-College Votes After the 2020 Census

Every 10 years, the 435 seats in the House of Representatives are reassigned based on the results of the U.S.
July 2, 2020

Recommended

Where Should You Retire?
retirement planning

Where Should You Retire?

This week, our Your Money's Worth podcast host Ryan Ermey interviews co-host Sandy Block about her recent story about the best retirement destinations…
July 7, 2020
3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing CEFs, you can sweeten the pot even further.
July 2, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020
Searching for the Perfect Place to Retire
Empty Nesters

Searching for the Perfect Place to Retire

We home in on two places with less traffic and lower costs. 
July 2, 2020