Don’t Mess Up The Next Market Crash

A market recession or downturn “soon” is expected by many, and one is expected in 2020 by Ray Dalio, who is an expert on the subject. He’s the greatest investor of all time by average annual returns, he was the best investor of 2018 as the market went through the biggest downturn since 2008 (he was up +14% for the year) and, most importantly, he just did tons of research and wrote a 500 page book on credit cycles or as he calls them, debt cycles.

At iBillionaire, we want to make sure our clients are educated about investing and informed about current market conditions, so we’re listening closely to Dalio and to what he says. We’re preparing our clients and want to prepare you, our blog readers too.

A market crash can financially devastate you, or it can be managed and even help you increase your wealth. Here’s what you need to know.

How you know a downturn is coming:

  1. The credit cycle. NBER reports that there have been 11 credit cycles since World War II with an average length of 69 months. The current run of 89 months in the expansion phase tops the average length of an entire cycle.
    1. Since 2008 there have been a few market blips like what happened in late 2018, but they’ve mostly been exogenous. The largest are listed below (in parenthesis is the peak to trough performance of S&P 500 SPY % during the time):
      1. Spring 2010: Greek crisis/Flash Crash (-13.12%)
      2. Summer/Fall 2011: U.S. debt downgraded because of debt ceiling, Euro debt crisis (-18.31%)
      3. Spring 2015: Oil crash, Brexit (-8.96%)
    2. Conclusion: We’re still in the same credit cycle that began in 2011. 
    3. The most recent downturn was about 3 months, from Sept 20 – Dec 24 2018. Main causes: Federal Reserve tightening, lower earnings forecasts, China/U.S. trade fight (-20.18%). The market has recovered a good portion of the loss as of February 2019, and the Federal Reserve did pause its tightening (more on why that might be partly a bad thing below), but the other two issues haven’t gone away. It’s also much later in the cycle. (Might the recent near-recovery be a bear market rally?)
  2. Prices are high, and return expectations are low, so there is only a small reward for taking risk. How do we know prices are high? We fully recovered from the 2008 crisis in 2013, and since then we’ve hit a number of peaks.  Also, simply look at certain public companies which are commanding massive market value because of their trading prices, yet they aren’t profitable.
  3. The Federal Reserve is ending their balance sheet reduction this year. On top of still-low interest rates, which the Fed has said won’t be hiked in the near-term, the end of balance sheet reduction theoretically gives them even less room to move to manage a downturn (with less room to spend) in order to keep it from getting out of hand like the Depression. Also, as they stand currently, interest rates have only room to go from 2.5% to 0%. In 2007, rates had room to move from 5.25% to 0%. 2008 was ugly but because of interest rate policy, and monetary and fiscal spending, it was a “well-managed” downturn. The rebound happened quickly: it started in just March of 2009.
  4. Record debt levels. Student loan debt, household debt, credit card debt – all at a record high. Debt is fake money that is treated in financial markets like real money, and if someone or entity doesn’t pay, many other parties end up paying, and they’re leveraged. Student loan delinquencies recently hit an all-time high. Harbinger?
Of course, there are two sides to every argument, and there are still bulls out there. But the general consensus seems to agree that at some point in the relatively near-term, a downturn is coming. So we’re going with the expert’s, Ray Dalio’s timeline of ~2 years from now.

The good news: For investors, none of it matters, as long as you’re invested (long-term)!


Why you need to be invested during a downturn

If you don’t hold financial assets, it’s highly unlikely that the government assistance that comes will benefit you. If you do invest, and own financial assets (stocks and bonds), the policy response to the downturn will, over time, benefit you. Here’s why.

In most scenarios, based on history, the monetary response will be QE or interest rates, which overwhelmingly benefits people who invest (QE gives money to holders of assets/debt, and lowering interest rates increases the value of current investments). The wealth gap historically widens during recoveries. Also, it is generally a good idea to buy in a downturn, even though impossible to time exactly, because prices are so low and have significant upside potential.

What To Do In A Market Crash

  • Do not make the rash decision to sell just because there is a crash.
  • If possible, continue investing as usual. We recommend investing the same dollar amount in the same low cost, diversified ETFs like the S&P 500 on a regular schedule so that your financial future planning isn’t held hostage by market moves. We recommend sticking to this strategy for years and years, through ups and downs.

Investments that perform well in a market crash

You may be wondering, does anything do well during a market crash? The answer is complicated. Yes, overall. But in the short-term, in serious crises, often everything gets thrown out, even the baby, with the bath water. There is a saying “in times of market stress, all correlations tend to 1,” meaning, everything behaves the same. With that said, note the performance of gold and U.S. government bonds during 2008:

By the way, you can invest in all of the three “hedge” investments above, which we recommend for turbulent times, as well as employ the strategy we recommend, dollar-cost averaging, which we recommend for all times, very easily on iBillionaire, with no trading fees, and with as little as $5 for each investment. (Gold, 20+ Year Treasuries, and 7-10 Year Treasuries.)

Important note: The information included in this publication is for educational purposes only. iBillionaire gathers its data from sources it considers reliable. However, iBillionaire does not guarantee the accuracy or completeness of the information provided in this publication. The opinions presented reflect the current judgment of the authors and are subject to change. iBillionaire makes no warranties, express or implied, regarding the accuracy of this information or the subjective opinions expressed by the authors. Officers, directors, employees and affiliates may have positions in the securities of companies discussed. The data included in this publication cannot and is not intended to, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell any security or investment, or represent directly or indirectly, that any graph, chart, formula or other device being offered will assist any person in making his own decisions as to which securities to buy, sell, or when to buy or sell them. All investors should consider the limitations of the information provided and the difficulties with respect to its application to any investing activity. All investments can lose value over time. Past performance is not indicative of future results.