As stock markets around the world continue to rally, especially the US stock market which is getting rather expensive, many people including analysts, fund managers etc are predicting an impending stock market crash.
The truth is that nobody knows and nobody can predict when a crash is going to happen.
The last major stock market crash was in 2008 and if you believe in the 9-year or 10-year cycle, then 2017 and 2018 become precarious years.
What Do You Do?
So you may ask what you should do. Sell every stock you have and go into hibernation? After all, the experts are shouting “Cash Is King”.
Well, keep CALM and have a plan.
Go Back To The Fundamentals
There was a period in time when Warren Buffett felt that the stock market was too expensive and sold out of the market and kept cash. Is this the time now? Well, at least he does not think so.
I would revisit the Stock Investment Framework and the Value Investing principles. As long as there are fundamentally sound companies with strong economic moats which you are convinced are undervalued, you can still stay in the market and make smart investment decisions.
There are opportunity costs of converting your entire portfolio to cash.
My Personal Plan
Having read from various sources, and talking to many people in the investment community, I have drawn up my own personal plan.
I currently invest in the Singapore stock market primarily for income, so my portfolio is mainly high dividend yield stocks and REITs. As for the US stock market, I rarely buy the share outright and instead use different options strategies.
The notion of a once in 10-year (approximately) opportunity is enticing and indeed your potential gain can be great if you buy the great companies at huge discounts.
I am taking a balanced approach of keeping stocks which are giving me good dividend yield or are still not overvalued. I also continue to acquire such stocks which I may not already own. Those otherwise, I have taken profit and the cash is my potential war-chest.
Some people have proposed a 50%/50% ratio where 50% is cash. I think this is just a guidance and you may have your own unique position to ponder.
Warren Buffett is his 2016 letter to shareholders mentioned “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
It might not be a bad idea that we also have our own washtub, albeit a much smaller one compared to his!
A video which shows the visuals of the previous crashes.
As always, please leave us comments below for exchange of ideas and for enhancements to this article.