Is the Stock Market Ready to Crash?

I have been receiving two to three calls a week from investors concerned that the market is going to crash. This seems a bit strange, because typically in a rising market investors tend to jump on the bandwagon rather than off of it.

In the late 1990’s high technology stocks were going through the roof, and everyone wanted a piece of the action. I can still remember visiting with an 80-year-old lady who desired to purchase Apple, Amazon and Google because everyone was making money but her.  Thankfully, I talked some reason into her just prior to the meltdown.   Irrational exuberance pushed stock valuations into a bubble that eventually popped. Long term investors who enjoyed both the ride up and the unraveling of excessiveness still made money.

In 2001 and through 2003, the market sustained a long painful setback as a result of a terrorist attack on the World Trade Center.  Long term investors once again made money over the next five years. 

The Financial Crisis of 2008 was one of the most difficult setbacks of all time and has challenged us all mentally. Fortunately, 2009 has staged a partial recovery from the fear and panic that had pushed the markets to abnormal lows.
Is the Stock Market Ready to Crash?

Unfortunately, the combination of all three of these events have caused many investors to reach burnout.  People don’t want to go through this all again, which is understandable.  I have heard speculations from callers that another 40% set back is coming.  One broker even told his client an 80% crash is coming in 2010.

After attending Schwab’s National Conference and American Funds National Forum and listening to their chief economists, I am not concerned about another market crash. As rational investors we all have to be prepared for a ten percent pullback at any time.  That’s just the normal risk of investing, and it’s why stocks can make ten percent or more per year over long periods of time versus the low rates in CD’s and bonds today. You are compensated for the risk, but you have to ride the roller coaster. 

We don’t make our day-to-day plans based on feelings. You need to build a solid financial retirement projection (which I can do for you) and you need to make your decisions based on reasonable facts for the long term.

Here are a couple of other factors to consider - A majority of new money flowing into mutual funds is going into bond funds.  With interest rates at historical lows and with the huge amount of cash flowing into bond funds, the actual bubble could be building in bonds, not stocks.  Do you really want to follow the herd?  I do hold a bond position as a measure of safety in most portfolios, but please focus on short-term bonds and safer bonds for protection.

We are not in a perfectly safe environment and there will be volatility going forward, but stock valuations are reasonable and for the next year inflation seems to be under control.  In the long run we will experience higher inflation than normal; and I will walk through my strategy on dealing with that in the next blog release.

Ron Dickinson, CPA, CFP®, MPA-tax