As we are hit daily with what seems to be a new Washington scandal or news of the latest ISIS terrorist attack, the stock market has continued to trend higher since the election, as measured by the S&P 500 Index*. As I am out at different social gatherings – graduation open houses, Fourth of July parties, summer BBQs and the like, a constant question will be asked by almost everyone: when is the next crash coming?
Let me be clear: no one knows when the next crash is going to come. However, I think investors have been conditioned to expect crashes to wipe out their portfolios. Humans are creatures of habit and like things to be predictable. The stock market has not been terribly kind to investors over the past 17 years. First, there was the 9/11 attacks which came at the start of a long, drawn out recession that sent the market spiraling lower for about 2.5 years. Then, just as we thought we had it all figured out and could make money in the real estate flipping business, the housing crisis of 2008 wiped out more wealth in both the stock market and the housing market since any crisis since the Great Depression**. For many investors, all they’ve known is that when the stock market makes new all-time highs, watch out – it’s just a matter of time before the next crash wipes away all gains.
Since we may have been conditioned to expect crashes, here is my “two cents” on the situation. Crashes rarely ever come when most people are asking about them. For example, how many people were asking about the looming housing crash in 2005? In fact, most of my clients were asking why we weren’t riding the real estate boom and what funds are available to invest in that specialized in real estate. People tend to forget that leading up to the tech bubble of 2000, lots of people were quitting their jobs to become day-traders in this new sector called internet commerce. Etoys.com (no longer in business) was going to revolutionize Christmas shopping and people HAD to have that stock. What could go wrong?
Bubbles in asset classes happen every so often, but rarely do many people have the wherewithal to profit from the bursting of these bubbles. My guess is that about the time most people are no longer asking the question “when is the next crash coming?” and are excited again about how high the stock market has gone, that will probably be the time when we should sit up and take notice. Ask yourself this: how many people are saying, “Wow! I think the Dow Jones has a chance to go to 50,000 over the next ten years?” Of course, I’m not making any type of prediction like that, but this bull market could continue to trend higher for some time.
In my opinion, investors should consider meeting with their financial advisors to determine whether their portfolio is positioned correctly according to their long-term goals and objectives, and making sure the balance in their portfolios of stocks to bonds is appropriate.
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It is not possible to invest directly into an index.