9 of the 16 largest crashes in history have come in the month of October. You may not know for example, on October 28th, 1929 the biggest stock market crash in U.S. history up until that time helped usher in the Great Depression of the 1930s, according to ETF Daily News, 10/6/15.
And the largest percentage crash in the history of the Dow Jones Industrial Average by a very wide margin happened on October 19th, 1987. The California Economic Forecast on 10/7/15 asserts what you may not remember, but I do, that the stock market declined more than 23 percent on that black Monday.
As my friend, Adam O’Dell, CMT, Chief Investment Strategist, Dent Research observed on 10/7/15 the National Park Service has a recommendation on how to survive a bear attack. The official website instructs visitors to “Play Dead” when you are attacked by a brown/grizzly bear. If, however, you are being attacked by a black bear the advice changes to
Do NOT Play Dead!
When hiking I’ve never been able to tell the species of bear by size and color. Nor, thank heaven, have I been close enough to a situation where I had to quickly decide to play dead or not. Investing your nest egg is never a matter of life or death. But when vicious declines occur they sure can interrupt you from having a nice day. Sometimes the mood changes for the rest of your life. It may have been awhile since you have experienced a bear market, but long-term wealth maintenance requires you to navigate bear markets every so often. Just as you need a specific plan of action when you encounter a real life bear, it is appropriate to recognize “What works in a bull market doesn’t work in a bear market,” says O’Dell. He goes on to say, “You see, bear markets are not mirror images of bull markets.” People think they have time to simply invert their strategy and go on with business as usual.
As of Monday’s close on 10/5/15, the S&P 500 was up 5% in just 5 days, according to O’Dell. That’s a fantastic short-term rally. But bear markets are a different animal. Most people expect that kind of big move to the upside in a bull market. But that’s not what the data shows. In fact, O’Dell helps us to see below that a rally of 5% in five days is about three times more likely during bear markets.
“So even tough stock markets spend more time in bullish trends, in other words, climbing higher than bearish trends…sharp, short-term rallies are actually more common during bearish ones. And, as you see, the 5% in five days variety have occurred about 4.3% of the time during them, versus 1.6% of the time during the market’s much longer bull runs,” according to O’Dell.
“By failing to prepare, you are preparing to fail.” - Benjamin Franklin
No one can predict the future. But it’s not about who is right about what is going to happen when, it’s all about who is ready for the good, the bad, and the unforeseen. Everyday investors may simply fail to plan only to wake up in shock and awe with an unforeseen event. Savvy investors, however, take the time to plan, review their assumptions, and put strategies into place in advance of catastrophic events. The thing is, bear market rallies are stronger than bull ones, as John Del Vecchio, Editor of Forensic investor, says repeatedly. Del Vecchio is absolutely right, so don’t be fooled by those who may suggest that a bottom is in. Look for the iceberg now before the ship crashes.
On 10/7/15 Harry Dent said to Dent Research members, “Retiring early and on speculation is not the ‘American Dream’.” We’ve been seduced by Keynesian economics for too long, and it simply can’t continue. We’ve grown out of touch with reality after nearly three decades of the highest growth, productivity gains and investment gains in history. But such booms and debt bubbles are always, and I mean always, followed by periods of austerity and deflation so the economy can re-balance and deleverage. To get us back to reality, it will require a major financial crisis already in the making… not more of the crack we’re addicted to.”
Allow me to remind you what I want you to know:
- Do not be complacent. The rules of the game have changed.
- Look at your investment history over the past 15 years. What can you see? Identify diversification strategies in addition to your home, cash, bonds, and stocks (or equity mutual funds).
- Take the time to research active management strategies. Rather than sit in your car stuck on the railroad tracks as a train is approaching, identify strategies that may have pulled your money out of risky assets and into cashwhere it is safe when the markets experience a severe reversal of fortune. It’s not about who is right. It’s all about who is ready. Get ready.
John L. GraceSecurities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. All indices are unmanaged and are not illustrative of any particular investment. The Dow Jones Industrial Average is a price weighted index of 30 actively traded blue-chip stocks. Past performance is no guarantee of future results. There are no guarantees that any managed portfolio will meet its intended objective. Neither asset allocation nor diversification can ensure a profit or prevention of loss in times of declining values. Certain statements contained within are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.