Structure a Portfolio Whose Behavior in Market Crashes is Acceptable
Market Crashes Happen
If you are 40 years old, you will likely experience 5 to 8 more market crashes during the rest of your life. You can try to predict them and trade through them, but history says you won’t be successful as no one has ever done so through more than one or two.
Instead, the best path to success is to structure a portfolio that will drop no further than you can mentally and fiscally withstand given the history of market activity.
There is no way to know when or why the markets will crash in the future and there is no way to know when or why they will recover. We can only know based on history that markets will crash and they will recover. And after they recover, they will go to newer and newer highs.
Investing in a diversified stock portfolio is the only way to achieve consistent and large returns over long periods of time. But you pay a price. And that price is having to ride through the many downturns during your life.
So, let’s not fool ourselves into thinking the markets won’t crash or that your portfolio won’t crash. It will. Instead, balance your stocks with more stable investments to the point that you can reasonably expect your future portfolio drops to be survivable.
At the very least, know what your portfolio has done in past crashes to understand what may come in future crashes. Doing this will lessen the pain of market turmoil and greatly increase your chance of success over time.