Posted by Times have been good the past few years. There have been a few short setbacks in the stock market, but no major events that sapped investor optimism and led us into a prolonged period of pessimism.
Now is a great time to talk about your positioning for the next inevitable stock market decline. 2008-2009 was the steepest decline in recent memory, but it was relatively short – 17 months of declines in the S&P 500. The market decline from 2000-2002 was not as widespread, but was much longer – 30 months of declines. Stock market charts do not capture the depth and fear of these times, as things continued to get worse, day after day, month after month. Until they got better.
During each of these times of decline, the news of the day was largely pessimistic. Both in the boom times before and the bust times after, calls of “this time is different!” appeared in the press, used to argue that the boom/bust would continue indefinitely. Those are dangerous words! Beware, whenever you read them – raise your guard.
How do you protect yourself from what comes next in the market? What do you use as a safety net? I can think of several things:
- Cash. Cash is always king. If you have a pile of cash on hand, you don’t need to worry immediately about job loss, down markets, up markets, etc. Make sure you have 3 months’ of expenses for your emergency fund in an interest-bearing account, and additional cash “ammo” in your investment account, available for deployment when the markets turn south once more.
- Frugality. If your expenses are low, you need a lot less cash on hand in your emergency fund. If you expenses are low, you can accept a job paying less than what you were currently making and still pay your bills. Don’t be caught in the cycle of “needing” to earn a certain amount to keep your standard of living.
- Work ethic. Don’t be that recently unemployed person that thinks they “deserve” a vacation, and spends their days binge watching Netflix for a few weeks before looking for a job. The early bird really does get the worm, and your ego and sense of self-worth will thank you for taking this to heart. This goes hand in hand with some work is better than none – don’t wait for the perfect opportunity.
Everything else builds from these. Having cash on hand will eliminate the need for short-term borrowing for emergencies. Being frugal will prevent you from buying that expensive car on credit, or a house at the top of your affordability limit. Not having those large debt payments will save you when the markets turn south, especially if you lose your job. A strong work ethic will result in income in good times and bad.
Whether or not you think we are close to our next market or economic decline in the business cycle, taking steps to shore up your personal safety net will ensure you are prepared.
Planning for FI 