Perry Mason always found the murderer, but he had a big advantage, because it was after-the-fact.
While the economic data is as good as I’ve ever seen it, at least during my lifetime, we should remember that “Bull markets never die of old age. They get killed first!” Hunting the killer is easier with a list of “the usual suspects.” Certainly, the Fed is historically the primary bull-killer. Other strong possibilities include (1) the Trump Trade War, (2) another military war, (3) a sudden environmental crisis, (4) a constitutional crisis, which I consider is a very real possibility, or (5) whatever else you want to add.
How do you deal with each of these possibilities? The investing history is pretty clear. Since it is so highly unlikely we would actually sell at top and have the courage to buy at the bottom, the average investor should adopt a “buy and hold” strategy, secure in the knowledge that another economic recession is just another passing bad dream. In other words, don’t drive yourself crazy worrying about a different strategy for each recessionary cause. Except for one!
A financial crisis occurs quickly and drives the market down dramatically, almost always igniting a recession. A “buy and hold” strategy for a financial crisis is seldom appropriate. Turning a significant portion of your portfolio into cash is not inappropriate. The trick is doing it quickly . . . very quickly.
If the investor is a light sleeper or hopes to outsmart the market, increasing the level of cash somewhat is very appropriate. Often, investors are reluctant to hold cash, afraid to have money that is “un-invested.” However, cash IS an investment, just like stocks are an investment. It is a nice, safe place to hide when risks increase.
Perry Mason knew what to do once he found the killer. Now, you do too!