I think Trump will do for the economy what he's done for his businesses.
March 10, 2017 5:16 PM   Subscribe

How do I invest if I think a crash is inevitable?

Between 401ks, IRAs, and our regular investment account, my spouse and I have a lot of our wealth invested in the stock market. Every other time the GOP has controlled the white house and both houses of congress, it's resulted in a major recession. The proposed tax cuts aren't going to help matters at all and I think this is going to be a problem for my portfolio.

For the most part, I'm invested in index funds and some other funds that are pretty similar (a mid-cap fund, for example). I have a degree in finance but I don't work with investing at all so I know enough to know I'm out of my depth but once I have a better idea of what to look for, track, and research I can probably figure out a lot of the details. I also know that I can't count on getting the timing right and even if I'm right that the market is going to crash the market can stay irrational longer than I can stay solvent if I do the wrong thing. I don't know if there are funds I could be investing in now that would do what I want or maybe I just need to know what I should be prepared to invest in if and when a decline starts and what I should be looking at to know when it's starting.

In a perfect world, I have something that is a S&P 500 index fund unless the fund's manager sees a crash or recession coming and then does...something prudent.

I don't think that I have some remarkable insight into things and I'm not trying to make a fortune, I just want to be prepared and/or take some steps to make sure I don't lose my shirt if and when things start going wrong. If I can manage to maintain a reasonable rate of return in the process, all the better.

So investment experts of the hive mind, what do I do?
posted by VTX to Work & Money (16 answers total) 11 users marked this as a favorite
What is the money for, how long until you want to withdraw it, and what's your risk tolerance?

Survive, or take advantage of?
posted by the man of twists and turns at 6:02 PM on March 10, 2017

Oh right.

Most of the money is for retirement, the rest is just long-term savings but could potentially be used as part of a down payment on a new house in the next 1-2 years. I keep about 6-months expenses in cash, the rest is invested in index funds. I try to minimize idle cash. I guess my risk tolerance is the market average since basically everything is invested in indexes.

Risk tolerance for the retirement accounts is a little higher since it'll be 30 years until I retire.

I could just keep on doing what I'm doing and that would probably be okay even in a down market but I feel like, had HRC won, I could have counted on 4+ years of solid 8%+ returns but Donald and the GOP are going to take that from me. At worst, I'd like to maintain as much stable-ish growth as I can so that I feel like I can donate more when it's prudent. I donated to the ACLU because of the travel ban, there will probably be similar circumstances that will make me want to donate (especially around mid-term time) and it's hard to do that while my assets are shrinking. If things get really bad, I might need to cash out all my assets and flee the country or help fund the resistance or some other silly (I hope) extreme.

So I guess a healthy dose of "survive" with maybe a little "take advantage" without screwing myself if I'm wrong.
posted by VTX at 6:55 PM on March 10, 2017

The two obvious and uncontroversial points:

(1) You have no business messing with your retirement asset allocations if retirement is 30 years off. With respect to those investments, it literally does not matter what Trump does to the economy in the next four *throws salt over shoulder* years, because you're not going to be selling them.

(2) If you genuinely expect to be needing certain funds within the next two years or so, they should already be in a conservative and liquid investment. So if you really think you're going to be making a down payment, put those funds into same.

I also know that I can't count on getting the timing right and even if I'm right that the market is going to crash the market can stay irrational longer than I can stay solvent if I do the wrong thing.

You say you know this, and yet you are still asking how to time the market? Listen to yourself.

The two things you can guarantee yourself by moving your non-tax-advantaged funds around right now are: (1) transaction costs and (2) taxes. The rest is fortune-telling. Your colleagues who actually work in investing make most of their money off their customers, not off the market.
posted by praemunire at 7:23 PM on March 10, 2017 [11 favorites]

What is your current asset allocation?

The only thing your can do is to maintain that. Rebalance from bonds to stocks as the market changes, and you'll by definition be buying at a lower price.

If you want that to happen automatically, that's what target retirement date funds are for.

I'm moving a bit towards bonds in my allocation these days, in anticipation.

But really, index funds mean you're in the same boat as everyone else, and as the studies show, that's really as well as any of us can hope to do; very, very few will ever beat the market.
posted by Dashy at 7:23 PM on March 10, 2017 [2 favorites]

60% equity, 40% bonds. When you re-balance you lock in your gains and hedge against declines, while buying each asset at its highest potential for growth.
posted by mikek at 7:26 PM on March 10, 2017

I basically just typed out what Dashy said. After Trump got in I moved about 5% of my allocation from US equities to bonds. A bad move in the very short term, but I've been using the same allocation since 2000, and I've gotten older since then. Yes, the last 3 bad market events happened during republican presidencies (two for Bush 43). But then there were 5 R presidents between them, ignoring the stock market crash of '87 and the listless recession/markets of the '70s and early '90s. So in other words just keep doing what you're doing, and apply whatever pressure you can bring to bear to ITMFN.
posted by morspin at 7:30 PM on March 10, 2017

If it were me, in my mid to late 30s, I would simply put some of my stock allocation in cash as a hedge against the stock market or the bond market going into a recession. I would put 25 - 30% of my assets in a cash like instrument. I would keep the ratio of your assets in whatever ratio you are currently comfortable with. The caveat is that I don't know you, don't know your risk tolerance, don't know your earnings ability going forward, don't know your family and any future liabilities such as college or medical costs, I don't know jack about you so this is just advice based on how I would hedge the risk that you perceive that President Trump presents to your assets.
posted by AugustWest at 10:04 PM on March 10, 2017

Just put your down payment money in cash and don't screw with the retirement stuff. Honestly that's the right move regardless of who is in power.

No reason to hedge retirement funds if retirement is twenty years away. You'll almost certainly botch taking the hedges off an getting fully invested again leading to lower long term returns. Weirdly that's harder than figuring out when to reduce exposure.
posted by JPD at 2:47 AM on March 11, 2017 [2 favorites]

It's beyond me why you want to own long-term fixed income if you are 15-20 years away from retirement. You are just trading lowered returns for less vol, when the whole point is that time allows you to deal with volatility. You can take permanent capital impairments owning bonds.
posted by JPD at 2:51 AM on March 11, 2017

How do I invest if I think a crash is inevitable?

As Vanguard's Jack Bogle famously said, "Don't just do something, stand there." What he meant by that is to have a widely diversified, low-cost portfolio, divided between stocks and bonds in proportion to your ability and willingness to take on risk, and then stay the course.

...what I should be prepared to invest in if and when a decline starts and what I should be looking at to know when it's starting.

What you should be looking at is your own portfolio, while ignoring the porn that passes for financial news. Re-balance out of the funds doing well and into the funds doing not so well, in order to maintain your asset allocation, either annually or, say, whenever your allocations are out of whack by +/- 5%.

In a perfect world, I have something that is a S&P 500 index fund unless the fund's manager sees a crash or recession coming and then does...something prudent.

You are describing an actively-managed fund. There are tons of them, they are costly and their track record is much worse than accepting what the broad markets give.

...make sure I don't lose my shirt if and when things start going wrong.

Taking action "when things start going wrong" is a classic mistake some investors make, because it generally means selling low and buying high, the exact opposite of what they intend. Anyhow, with a 30-year investing horizon, a crash today will just be a blip on the graph in 2047.

What did you do during the crash of 2008-09? If you did nothing but re-balance, it all came roaring back and then some. If you sold on the way down and bought on the back way up, you not only lost money, you sacrificed an opportunity to fully participate in the recovery.

Whenever people get nervous about the market being too high or over-valued, I like to refer them to this graph, which shows all the times the Dow reached an all-time high.
posted by Short Attention Sp at 5:24 AM on March 11, 2017 [2 favorites]

I found this to be a pretty convincing argument for "stay the course": What if You Only Invested at Market Peaks?
posted by nowoutside at 5:43 AM on March 11, 2017 [1 favorite]

Perhaps this well help clarify for the OP too: What do people here mean when they use the term 're-balance'?
posted by Halo in reverse at 1:10 PM on March 11, 2017

If you have determined from your investing horizon, age, risk tolerance, etc. that you want an allocation of your assets that is, say, 80% stocks and 20% bonds:

During a downfall, stocks fall much more in value than bonds. That might cause your AA to fall to, say, 70:30. To rebalance, you shift some of your bonds to stocks.

But by definition, the event that changed your AA to need rebalanced was that stocks fell in value and are now cheaper. So when you buy stocks during rebalancing, you're buying them at a lower price, i.e. you buy low, sell high.

If you have no bonds, you can't benefit from rebalancing.
posted by Dashy at 3:41 PM on March 11, 2017

Since on average equities go up more often than they go down, you are hitting your long-term portfolio performance by doing that. You are just controlling vol.

You are better off using cash for that leg of the hedge if that's what you want to do.
posted by JPD at 5:12 PM on March 11, 2017

So basically what I'm hearing is that I should find a likely bond fund or the like with which to balance assets. I should have start sooner but at least now I know and if I get SUPER anxious I can re-balance quarterly or something. Easy enough.

The retirement stuff I'm fine leaving alone, I'm happy to hear that I'm not, in fact missing anything on that front.

In the '08 recession I had gone back to college full time and then had a bunch of student loans with interest rates high enough to make paying them down my obviously highest rate of return.
posted by VTX at 5:15 PM on March 11, 2017

With the retirement money, when the next crash comes, stay the course. You must not think of it as your index losing half its value. Think of it as a clearance sale on index funds! Buy low!

With the 1-2 year money, stash that somewhere with less volatility. Back off on growth (aka risk) and move towards stability with this money.

Regarding Trump, this kind of politics forecast rejigging came up in the Bad Investment Advice portion of the Couch Potato podcast in episode 2. Worth a listen!
posted by sadmadglad at 7:18 AM on March 12, 2017

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