It’s election season again, and that means there are a lot of candidates and experts on TV working to convince the American public that ruin is just around the corner, unless, of course, they pick the “right” candidate in the voting booth. One of the favorite tactics used by both sides is to claim an impending catastrophic collapse of the stock market, leading to a prolonged economic depression.
Once you get past all the fear-mongering and propaganda, though, is there really any truth to these doomsday prophesies? Are our financial markets really going to collapse? There are some signs that point to it.
First of all, we’re in a long bull market. In fact, we’re going into the seventh year of stock market gains. While growth isn’t as rapid as it was before other famous crashes (it’s not nearly as bad as 1999, for example), many economists are pointing out that it is probably time for a correction.
To make matters worse, investors aren’t paying attention to the market’s rules. Rather than pay attention to a company’s P/E ratio and make reasoned, informed decisions about what to buy, investors seem to be throwing their money at ATMs (anything that moves).
In fact, the average P/E ratio is now nearly 23. Compared to the average point of 15, this means that stocks are priced 53% higher than their 10-year averages. Historically, that’s the activation energy needed for a market crash.
Also, too many investors seem more concerned with missing out on a “great” stock rather than taking the time to see if it’s really something that they should be buying. Not only are they not paying attention to the rules, but they’re not doing any research. Instead, too many investors are simply buying whatever seems to be trendy. This is the start of a buying panic, which has always led to huge losses.
Finally, investor sentiment is low. Investor sentiment surveys are saying that most people with money in the markets are expecting prices to drop soon. Many economists are saying that the market is overpriced, while many experienced investors are seeing the same signs of an impending market crash that preceded the crashes of 1999 and 2008. When large investors are expecting a market crash, they’ll move their money out of stocks, triggering a correction in some industries.
Fortunately, there are a number of things that an investor can do to avoid losing money in the coming bear market. Start preparing by diversifying now. Don’t wait for prices to crash before you pull your money out.
Right now, you can sell your investments for a good profit and reinvest in real estate, commodities, or bonds. Don’t make the mistake of trying to hold on till the last run-up in prices, only to discover too late that prices crashed too fast.
Start by selling your stocks in the most volatile of sectors, technology, internet companies, and commodities. Once the bear market arrives, take your profit from the alternative investment and start buying up stocks at bargain prices.
Also, despite the fact that it can seem like no one else is paying attention, make sure that you continue to follow the rules of good investing. Sure, it’s tempting to throw your money at the company your neighbor or co-worker just made a huge profit from, but odds are good that those shares have already reached their peak.
That means you’ll be buying the stock at its highest point, and you’ll watch as the market corrects itself. Don’t jump in with everyone else who are in the middle of a buying panic! Instead, stick with a strategy of evaluating every stock you purchase the old-fashioned way: consider its P/E ratio and its potential future earnings, not it’s past performance.
When choosing stocks, make sure that you invest with a long term strategy in mind. Chances are the latest market fad will only result in you losing money. Instead of trying to time the market and take quick profits, invest with a long term strategy. Pick stocks that will make it through a market crash. While they may lose value for a while during a bear market, they’ll come back as soon as the market picks up again.
The current bull market has lasted longer than any other market in recent history. It would be foolish to think that it’s going to go on forever, but it’s also important to realize that a bear market doesn’t necessarily mean investors will lose everything. Start moving your money now, and you’ll be ready when prices drop to take advantage of them.
Regards,
Ethan Warrick
Editor
Wealth Authority
