Why timing the next crash is a dangerous game
“I just sold everything to avoid a stock market crash.”
This is a refrain I’ve heard from time to time over the last few years.
As the bull market continues to push higher, investors are wondering if a stock market crash is coming and some have defensively moved their cash from the market to the sidelines.
The thinking goes like this: “Maybe not today, maybe not tomorrow, but sometime soon the stock market just has to crash and I don’t want to be invested in stocks when it does.”
At first, this logic makes sense. If it seems like stocks are overvalued or there is an upcoming economic threat on the horizon, why not jump out now and avoid the crash?
Let’s dig deeper to see if “jumping out early” is a good strategy.
A stock market “crash” can be defined as a “correction” (a 10%+ decline in market prices from a recent high) or a “bear market” (a 20%+ decline in market prices over a two-month period).
So here’s the basic question:
If you think stocks might crash, should you move your portfolio into something safe (such as cash, bonds, or money market funds) and try to avoid a possible correction?
Essentially, should you try and time the market by jumping out at the top and jumping back in at the bottom?
The short answer is this: Research suggests timing the market is extremely difficult for the average investor and will likely cause you more harm than good.
Before I cover the research, there’s one big caveat: You should never invest money in the market that you may need to use in the next 5–10 years.
Why not?
Over the last 90 years, the stock market has created incredible wealth and the general trend has been a steady march upwards. If you simply held through every selloff, correction, depression, and bear market, you would’ve done incredibly well. Over time, the…
