Can You "Handle" the Next Market Crash

Can You “Handle” the Next Market Crash?

Charlie Bowers Income Planning, Income Planning, Insight Investing Articles, Investing, Investing & Planning, Retirement, Risk Management

The S&P 500 has generated very nice gains since the low of March 2009, more than a
decade ago. Catch that? More than a decade ago. That’s a long time since the last deep dive of the market.

If you are like most, you know that there will be another market crash, but you just don’t know when. History leads us to believe that it will come sooner rather than later. So, if it comes in the near future, are you prepared? Will you be fully vested in the market, or are you pulling out of the market and moving into something “safer.” And if you pull out of the market, and the market continues its upward trend for another 4 years, are you going to be happy with your decision. In any event, please don’t be like the many investors that will be in the market when it crashes and then choose to sell out near the bottom.

It’s tough to see your account value shrink. Ever. But it is especially tough emotionally
when the market tanks.

There May Be a Better Way

Most of us have been “taught” by the financial world to monitor our market account values closely. That’s how we know how successful we are. But that thinking focuses our attention on a very volatile parameter, which then greatly impacts our contentment in life. So, is there a better way? I think so!

How about investing for income?  Think about this. You have a $500,000 retirement account that you follow the value closely. You need to sell enough of your portfolio to generate $25,000 per year to create cash in retirement. You already hate to sell when the market is down, but how much worse do you feel when you have to sell during a crash? You still need the $25,000 cash, but your $500,000 portfolio is now worth only $300,000. I really understand the pain and anxiety this can cause because your account may no longer be able to handle your $25,000 annual cash need.

This type of frightening scenario is why many people flee to what they believe are less risky investments and accept that their expected return is likely much less.

But what if you are invested for income? What if your $500,000 portfolio held dividend paying stocks that could generate the $25,000 annually that you need? Most likely after that next 40% market crash, if you don’t sell out, your portfolio will continue to generate that $25,000 you need.

So the bottom line is, “don’t think in terms of portfolio value, think in terms of portfolio income.”

Instead of saying my portfolio is worth $500,000 today, say my portfolio is generating $25,000 per year for me, regardless of the market volatility. Now your perspective is on what your portfolio is doing for you and not on what the whims of the market are doing to you.

At the end of the day, regardless of what the financial world has led us to believe, almost all of us are investing for security and income which are our true measures of success.  What matters is consistent and preferably rising income generated by our portfolio and not the portfolio’s fluctuating value.

Back to Those Who Sell at the Bottom of a Market Crash

One of the biggest mistakes many investors make is selling out of the market at the low point of a crash. This is probably the worst possible time to exit. You have now traded your shares for a certain amount of money in hopes of not losing even more. Just remember this; if the sale is made, for every seller there is a buyer in the stock market. So that buyer thinks he or she is getting a good deal on his or her purchase of your stock shares.

If you are invested for income, market crashes can be advantageous situations for you, because company stocks are now being sold at deep discounts. This typically means you are getting strong companies that are now paying a higher dividend yield than just prior to the market crash.

What's Next

Once you decide becoming an income investor is for you, your ongoing tasks will be:

1. Finding recession resistant income stocks to buy
 
2. Knowing which stocks are overvalued that should be sold or replaced