Since Donald Trump won the election The Market is up 6.4% and since his inauguration The Market is up an astonishing 12.9%. I’ll admit I didn’t see any of that coming. My thoughts were the exact opposite: the election of such an inexperienced, erratic and brash POTUS would put US equities on edge teetering toward a downward spiral, especially after such a long march upward during the Obama administration. Fortunately for my 401k and non-retirement investment accounts I couldn’t have been further from the truth.
The Market has been on an absolute tear since the 2008 Recession, since the 2009 lows it is up over 250%. No one can predict win this bull market will end, I know I surely can’t. I don’t know if this will last for another 6 months or 6 years, but since the trend is up I’ll stay invested and ride this bull market trend for all it’s worth.
However what goes up must come down. Will the US enter recession because of Trump’s (or the next president’s) policies, a dysfunctional Congress, oil prices, tax policies, rising interest rates, protectionist trade policies, immigration, foreign exchange, rising national debt or growth of foreign markets? Who knows – maybe all of those things, none of those things or a combination. No one on earth can predict the date, time and exact causes of the next US economic downturn, but that is not important anyways.
What is really important is the ability to recognize and react to a bear market, just as we do to a bull market. In a bull market we all know to be fully invested, ride the wave upward and hopefully make a ton of money. The same opportunity exists to make money in a bear market, but not many individual investors take advantage of the downward trend. At best you are taught to simply dollar cost average down which just exposes you significant drops in your portfolio value, value that will more than likely take years and years to recover from.
My plan is to study the last significant stock market drops for signals, signals I can use to alert and confirm for me the next bear market. With that knowledge I’ll know when to move to cash or even take a position against the Market. Again, this is not to time The Market. My goal is to avoid the 50% losses experienced in 2008-09. The numbers show us the “buy and hold” strategy preached on TV and in books and magazines is a sucker’s strategy. Just because you can’t exactly time the top or the bottom doesn’t mean you should foolishly allow your portfolio to ride a wave downward losing 25%, 40% or even 50% of its value. I know I won’t when the next recession hits…and sooner or later a recession will come because all bull markets must die.