Investors who bought the S&P 500 at rock bottom this year have a whopping 65% gain to show for it. That's a lot for nine months.
The S&P 500's last 65% gain took about five years, from late 2015 to early 2020. And we know what happened in early 2020...
As COVID-19 and other calamities threaten world economies, some investors fear we might be looking down the barrel of another stock market crash.
This would be a matter of the stock market recovering too fast - which, to be fair, is always the fear when good things happen fast. Sure, vaccines are on the way. But it could be months before they're distributed in certain places.
There is still so much uncertainty about the vaccines and a new presidency that it's unclear where the market will be next summer.
In the event of a market crash, however, we know what to do. The name of the game is to always be prepared.
Amid all the unknowns, there are a few knowns to latch onto. Those can inform us on what stocks we ought to sell and where else to put our money for safety.
Should We Brace for Another Market Crash?
Coronavirus cases are climbing this winter. Though certain stocks, like e-commerce and delivery, could perform well, the economy is still experiencing a very real struggle.
Lockdown measures have resulted in over 100,000 restaurant closures this year. Highly concentrated areas like Los Angeles and New York have not eased up, and it's left many of these social gathering places fighting for their lives.
There's no telling when the next stimulus bill will arrive. But there's a running hunch that our friends in D.C. are more interested in bailing out big banks and other clunky corporations than stimulating consumption.
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However, it pays to keep in mind that the stock market rarely, if ever, does precisely what we think makes the most sense.
All of these things could happen and cause the stock market to stage an epic rally.
How could that happen? Well, bad is the new good.
Traders might react positively to news that appears terrible, because they expect more aggressive monetary stimulus from the Federal Reserve.
This was the expectation with a potential Biden administration, and now we've got it. There's potential for a massive relief rally and stimulus package stave off fiscal disaster.
So don't sell everything and hide under a table. One of the most painful things you can do as an investor is to sell anticipating a crash only to watch prices rip higher.
This is the first thing you should do.
Tip No. 1: Get Ahead of the Next Market Crash
Take baby steps. Now is an excellent time to go through your portfolio and examine all your positions.
Why did you buy this stock or fund? Do you still love it?
If you consider the stock to be a long-term holding and do not love it, it should probably not be a long-term holding.
Consider treating a stock you merely like as trade. Consider setting a trailing stop or selling call options against the shares to bring in cash.
You want to love your long-term holdings like Charlie Munger of Berkshire Hathaway loves his Costco Wholesale Corp. (NASDAQ: COST) shares. He once said of his holding of the retailer that "It's one of the most admirable capitalistic institutions in the world."
That is, when it comes to the stocks you love, like Charlie loves Costco, do nothing.
Set trailing stops on those stocks you are merely flirting with or dating. If the market keeps falling, you can use the funds to reinvest in the ones you love.
Tip No. 2: Look for Buying Opportunities
Crashes happen. They are unpredictable. They rarely happen when we expect them to happen.
The real key to surviving a crash is to view it as a significant buying opportunity that can make you rich.
If you walk into the grocery store and steak is on sale for 30% less than last week, you're in luck. Assuming you are not a vegan or vegetarian, you will load up steaks and fire up the grill.
Use the cash from selling stocks you like to buy the stocks you love at 20% or 30% off.
When markets are crashing around your ears, it is not a good time to build a list of stocks you wanted to love but were too expensive. Start building a lot of stock that you would love at lower prices right now.
What are the great companies you have missed since the March lows? How about the stocks you missed in the aftermath of the Great Financial Crisis? Put them on the list.
Now, if your risk tolerance is a bit higher, the reward could be as well...
Tip No. 3: Find an Options Trading Strategy
More aggressive investors might want to consider a cash-secured put strategy as the market falls and volatility soars.
Selling puts obligates you to buy 100 shares of a stock at a certain price, in a specific amount of time.
When prices are falling, premiums are fat, and you can be very well-paid, just for agreeing to buy stocks in companies you want to love forever.
When markets are crashing, it is not a good time to worry about short-term results. It is almost a certainty that the great companies you buy during a crash will fall further after you hit the buy button.
Don't worry about that.
Focus on the fact that fortunes are born in bear markets.
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