Markets

How to Survive a Market Crash

By Charles Sizemore  |  June 19, 2019

Yesterday, I called out Warren Buffett for giving some pretty reckless advice.

Sure, index funds can be fantastic investments… if you have a time horizon of 20 to 30 years. Any less than that, and it gets iffy.

When you buy “the market,” you’re not only getting the ups, but you’re also getting the downs. And, as we saw in both 2000 to 2003 and 2007 to 2009, the downs can be absolutely brutal. In less than a decade, investors in S&P 500 index funds saw their wealth quite literally cut in half twice.

But here’s the thing… Not everyone lost half their money in the 2000 to 2003 and 2007 to 2009 bear markets. If you had the intestinal fortitude to short the market, you would have made out like a bandit in both bear markets.

Let’s be honest though, would you have had the guts to actually do it?

Have you seen the movie The Big Short? It covered the story of a small core of hedge fund managers that shorted the housing market leading up to the 2008 meltdown and made millions. But they all almost went broke in the process. And I mean that literally. Before they were finally vindicated, the managers were facing margin calls and client lawsuits.

The point is, shorting the market is hard. I don’t have the stomach for it.

The good news is that there are plenty of other ways to make money in a bear market. And they don’t require an iron gut like shorting does.

Thriving in a Bear Market

Take a look at this chart. It shows the performance of the S&P 500 during the tech wreck.

 

But now, compare that bloodbath to what you see here:

Looks a lot nicer, right?

Rather than lose 50%, this strategy — which I’ll describe in more detail later this week — would have helped you make 22-times your money.

No, it wasn’t a net short. And no, it didn’t use options.

Not only did this strategy sidestep one of the worst market crashes in history, it grew by a factor of 22. And it didn’t stop there. During the 2008 meltdown, when the market lost 50% of its value again, this strategy managed to triple in value…

I’ll go into more detail later this week about this strategy and how it managed to make a killing during two of the worst bear markets in history. But first, I’d like to leave you with three core principles of how to survive and thrive when the going gets tough.

The Three Key Principles of Bear Market Survival

Key No.1: Take emotion out of the equation by having a system in place.

Our emotions are our own worst enemies. Our natural impulse is to buy at the top when it feels safe and sell at the bottom when it feels scary. This, of course, is a recipe for financial ruin.

I might have taken Warren Buffett to task for recommending everyone buy index funds, but he was absolutely right about one point. Buffett said to invest “consistently.” Meaning to continue to stick to your investment plan, even when the market is crashing.

I honestly believe that investors like Warren Buffett are sociopaths. I don’t mean that in a bad way. They’re not serial killers or psychos. But they’re not normal. They don’t emotionally respond to market swoons the way regular people do.

That’s great for them. But it’s not really something that can be taught. The rest of us need a mechanical system to force us to behave the same way.

Key No.2: Diversify.

This isn’t rocket science. No one should put all their eggs in one basket. We all know this.

But you have to look out for what I call faux diversification. A lot of investors back in 1999 felt they were diversified because they owned five different mutual funds. But what they failed to realize was that all five funds essentially owned the same core of stocks. That’s not real diversification, as they learned the hard way in the tech bust.

Likewise, a lot of investors learned in 2008 that owning five Florida rental houses isn’t real diversification if they all rise and fall in value together.

While putting all of your money into an S&P 500 index fund is easy, it’s generally not the best move.

It’s great in a bull market, but it’s murder in a bear market. A smart investor might keep a portion of their portfolio invested that way, but they’ll also diversify across strategies that are uncorrelated — or at least minimally correlated — to each other.

Key No.3: Once you pick a strategy, stick to it.

This is also part of what Buffett was talking about when he said you should invest “consistently.”  There is no strategy that works all the time, in every market. Even with strategies that win over the long term, there will be months where they underperform the market. When you find a strategy you believe in, you have to give it room to run. It will have stretches where it underperforms, and that’s okay. All strategies underperform at one point or another, which is why Key No.2 is so important.

If you’re properly diversified, you can be confident and let your strategies run.

For tomorrow, I’ve decided to join you live from my vacation in Peru to help make a huge announcement.

It’s about a way I believe you can recession proof your portfolio while potentially making money, no matter what the market does. It’s a flexible approach to the markets that my backtesting shows could have helped you through the market crashes I showed you earlier.

And if you have any questions or comments about what I’ve covered so far, send me an email at richinvestor@dentresearch.com.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR