The Coming Crash

A stock market crash is coming.

From time to time, the stock market crashes.  There’s no reason to believe this volatility will stop.  Despite the large fluctuations, the market has been a reliable tool for long term wealth building for the last 100+ years.

  1.  The market has been crashing since there was a market to crash.  People get “irrationally exuberant” and make unwise bets, which bid up prices, accelerating any bubble that has already formed.
  2. The price of stock compared to the earnings of the underlying companies right now is very high (e.g. average is 16 and we’re at like 29).  That’s why there’s a -1.7% expected earning on stock right now – because of the way it has behave in the past when the ratio is as high as it is right now.
  3. We didn’t seriously dismantle the mechanisms of the last crash.  The worst offenders were not criminally prosecuted.  Trump has already signaled he wants to roll back Dodd-Frank.  People haven’t stopped buying monster houses on 30 year mortgages.  The system and the culture still point in the direction of making big bets and taking big risks.  The system is also just as complex as it was before, and as humans, we’re still just as overconfident that we can explain it.  I’m not saying the housing market will crash and bring everything down again – I’m just saying something (e.g. China) will crash and bring everything down for a while.

The housing market is somewhat correlated to the stock market, so I should expect my condo’s value to drop some w/ the crash.

When will it happen?

Nobody can say.  We can say historically that the median gap between recessions is about 4 years.

http://awealthofcommonsense.com/2015/02/when-will-the-u-s-have-its-next-recession/

A recessions crash the market, but market drops do not always lead to a recession.

https://www.quora.com/Why-do-stock-market-crashes-cause-recessions

It’s a statistical thing, but it seems likely that we’re closer to the next recession than we are to the preceding one.

What to do about it?

Options.

  1.  Ignore it, stay vested, and take the long term return.
  2. Move some of the portfolio into bonds to decrease the losses.
  3. Move all the portfolio into bonds.
  4. Move your money into real estate.
  5. Move your money into cash.
  6. Sell the condo

It’s funny how the psychology of it means that b/c I listed only 1 equity option and 4 conservative options, the reader is probably already giving more weight to the conservative options.

People are really bad at timing the market, and I have no special talent.  Historically, plenty of people have been sitting where I’m sitting now, seeing similar data, and then they pull their money out and lose out on some big market gain.  That’s a real concern.

I tend to think about it in terms of – what could I do with the money that would be a good idea no matter what happens in the market?

  • save up cash for grad school
  • Condo payoff returns 3.125% no matter what
  • save up cash to start own business
  • save up cash to buy a good real estate deal

Sadly, retirement funds can’t (practically) be used for these things.  Given that  I stick with Betterment, I really just have the bond option with them.  But excess money after I finish paying off the condo could certainly go to grad school, real estate, or business, so those are good bets.

I will always need a place to live, so if the condo’s value falls $100k but I wouldn’t have sold it anyway, the loss is only theoretical.

For now, I’m still holding 100% index funds in my retirement accounts.

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