Market Crash: The Forest & The Trees
Dear Investor Club reader,
Overnight, sharemarkets continued to power higher, with US markets shrugging off the 18% fall in Facebook’s share price.
The chart above shows the USA’s Dow Jones index over the long run. As can be seen, it has been a few years since the last major fall, back in 2008.
Australian Expert Sounds The Alarm
In his 2018 letter to shareholders, Magellan Financial Group’s founder and lead investor, Hamish Douglass, said the risks to investing currently outweigh the benefits.
Douglass recently moved his long-running investment portfolio to 21% cash, which he says is conservative. “In our view, only conservative investors sleep well,” he wrote.
Douglass said investors face an “extraordinary cocktail of circumstances”, including recent rises in bond markets, rising interest rates and… Donald Trump.
Douglass believes Trump’s tax cuts and spending plans could lead to a jump in inflation and an unexpected increase in interest rates.
“The cocktail of circumstances could be explosive,” Douglass wrote.
What Happens Next?
According to Douglass, there are three possible outcomes for investors:
1. There is a near 50% chance defensive shares (e.g. blue-chip dividend shares) underperform growth shares (à la technology companies).
2. There is a near 50% chance we witness a 20% to 30% fall in global share markets in the next 12 to 18 months.
3. Finally, an “external event occurs” and shares “even rise“.
To me, that sounds like a bold but sweeping catch-all: Some shares could rise, some might fall, or something else entirely might happen. So whatever happens next, I told you so.
The Forest & The Trees
As part of our free podcast series, I recently interviewed some of Australia’s leading investors (many of whom you’ve probably never heard of). What I found was many of these professional investors do not care what the market does or is going to do.
What they do care about, however, is the individual businesses they’re buying into via the share market.
The real reason good investors don’t care about market predictions is because good investors buy a portfolio of carefully selected companies. They are able to see the forest from the trees.
By that I mean, good long-term investors are not buying the entire forest. Good investors buy better-than-average individual companies with bright growth prospects. They’re not beholden to Trump’s tax cuts or interest rates.
As Peter Lynch says, “Behind every stock is a business. Find out what it’s doing.”
For what it is worth, it’s widely believed share markets crash, on average, every 7 to 10 years. So by definition, we’re always getting closer to the next crash. It shouldn’t come as a surprise when the market finally falls 20%, 30% or more.
My modus operandi is simple: hope for the best, prepare for the worst.
How do I do that? I suggest:
- Getting rid of all debts charging 10% or more in interest
- Having 6 months of cash set aside in a Go Bag (high-interest savings account) for emergencies.
- Investing up to 20% of take-home pay in only the highest quality ASX and global shares/businesses for the long run (3+ years minimum).
- Reinvesting the returns.
It’s the same strategy I’ve been following for years and the same strategy that is covered comprehensively in my new online advice service Rask Invest.
I’ll be investing more of my family’s money in my upcoming best investment idea, regardless of what the market does.