Worst Crash Ever?

Jim Rogers is a legendary investor and prolific author.   In a recent interview with Business Insider, Mr. Rogers called for the worst correction ever and added we’re headed for disaster.[1]  In fact, Mr. Rogers has made similar predictions for the past six years.[2] 

Worst ever?  The Dow Jones Industrial Average closed at 21,235 on June 12, 2017.  A correction of 85% would send the index to 3,185 a level not seen since December 1991.

 The U.S. stock market has suffered some doozies over the years.   Notable stock market corrections include 1907, 1973/74, 1987, 2000 and 2008.    On October 19, 1987, the stock market fell 22.5%.  During the Great Recession of 2008 the stock market dropped 37%.   The Great Depression lasted ten years and is considered the worst (economic) time in our country’s history with the stock market falling 85% from 1929 to 1932.  Despite these thunderous corrections the stock market has always recovered. 

When I started my investment career my grandfather asked if I’d read The Great Depression of 1990 by Dr. Ravi Batra.  I told him I hadn’t because I didn’t think it would happen.  He said it’s important to read several points of view to make informed decisions.  I read the book.  The stock market of the 1990s increased 426% hitting 10,000 before 2000.  A $10,000 investment in the Vanguard S&P 500 Index Fund (VFINX) on 1/1/1990 was worth $52,668 by 12/31/1999 averaging 18.07%.[3]

We, too, must be leery of overly optimistic forecasts.  Harry S. Dent, Jr., The Roaring 2000’s: Building the Wealth and Lifestyle You Deserve in the Greatest Boom in History, projected the Dow Jones Industrial Average would reach 35,000 by 2008.   It closed at 8,776.  A $10,000 investment in the Vanguard S&P 500 Index Fund (VFINX) on January 1, 2000 was worth $10,361 by December 31,2000 averaging .32%.[4]

It’s not wise to invest on conjecture, however, if you’re concerned about the worst correction ever here are a few steps you can employ to protect your assets.

·         Avoid excessive leverage and debt.   Your total debt load should be less than 38% of gross income.  If your monthly gross income is 38%, your total debt payments should be less than 38%.   Likewise, your investment account should avoid excessive margin.  You’re allowed to margin (or borrow) 50% of your account balance to buy additional investments. I’d recommend limiting your margin balance to 10% of your account balance.

·         Keep a cash reserve.  A cash hoard of three to six months of expenses is recommended.  If your monthly expenses are $10,000, your cash value should be between $30,000 to $60,000. 

·         Invest in Treasury Bonds.   U.S. Treasury investments will perform well during times of calamity.   They are inversely related to stocks.  If stocks fall, treasuries will rise.  During the correction of 2008 U.S. Treasury Bonds rose 25.9%.

·         Rebalance your account.  A portfolio of stocks, bonds and cash will fluctuate with market conditions.   Rebalancing once or twice per year will return your account to its original allocation and help reduce your portfolio risk.

·         Diversify.  Diversify your holdings across stocks, bonds and cash.  The stock holdings should be spread between large, small and international companies.

·         Avoid Concentration.  Individual stock positions comprising more than 10% of your account balance should be trimmed to 3% to 5%.  Reducing your dependence on one or two stocks will benefit you during a market meltdown.

Will Mr. Rogers prediction come true? I hope not.  It’s difficult to make investment decisions based on predictions, forecasts or opinions because they rarely come true.   Invest according to your financial plan.  A plan built on your hopes, dreams and fears will treat you well in good times and bad.

Tomorrow, tomorrow, for I know not when tomorrow will be. ~ Abigail Adams.

Therefore keep watch, because you do not know on what day your Lord will come. ~ Matthew 24:42

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

June 12, 2017

[1] http://www.businessinsider.com/jim-rogers-worst-crash-lifetime-coming-20..., Jacqui Frank and Kara Chin, June 9, 2017.

[2] http://awealthofcommonsense.com/2017/06/bulls-bears-charlatans/, Ben Carlson, June 11, 2017

[3] Morningstar Office Hypothetical Tool.

[4] Ibid.