For the sake of your retirement money, you might want to read this letter. This is not meant to be a gloom and doom report. This is simply a letter to you warning that it is important to understand what could be developing in the stock market. ANYONE can understand what I am about to show you. So, don’t stop reading because you think you will not understand.
Here is what you need to know:
The price of the stock market goes up and down based on the emotions of investors. It is driven by fear and by greed. As a result, a picture of the stock market today can look very similar to pictures of the stock market in the past. Said another way, the stock market travels in patterns. As a result, a pattern today could look similar to a pattern in the past.
The picture below shows a pattern where the stock market just travels sideways between two lines. What money managers are looking for is which direction will the market eventually travel? After traveling sideways for a while, will it travel up above the top red line or below the bottom red line?
Since 1929, there have been 12 bear markets. A bear market occurs when the stock market declines more than -20%. 5 of those 12 Bear Markets were major declines with one being a minimum of a -48% decline and the biggest one was a decline of -86%.
Before each of these 5 major declines occurred, each of the 5 showed the same type of pattern.
1929, 1937, and 1973
These three bear markets looked similar in pattern. In all three time periods, the stock market started in a sideways pattern then rose above that sideways pattern then started major declines.
1929 –before a -86% decline
1937 –before a -59% decline
1973 –before a -48% decline
2000 and 2007
Before these two major declines, the stock market was in the same sideways pattern. However, unlike the previous two patterns, these two patterns never rose above the pattern before the major decline. They just fell below the pattern right into the major decline/bear market.
2000 –before a -48% decline
2007 –before a -56% decline
What is the stock market doing today?
Does that mean that the stock market is about to turn into a major decline? Given 5 previous examples, history would suggest that there is some degree of probability. As Mark Twain said, “History doesn’t repeat itself but it does rhyme.”
Pretend you live on the coast of Florida and a meteorologist reported a weather pattern that has produced a category 5 hurricane several times in the past. I would be on alert. I would understand how much risk I was taking. Finally, I would have a Plan B. What is a plan B? Well, you can read more about Plan B investing here. You can also send me an email here and I can tell you how I navigate a Plan B strategy for my clients. You can also call me at 972-386-0384 and we can start a conversation.
History would show that the stock market goes in and out of good cycles and bad cycles. That is the world of investing. The key is to prepare yourself and be ready. Wall Street will tell you just ride it out. Why would you ride it out when there are alternatives? It never makes sense to just sit there and take the brunt force of a major decline.
Seek out your options and be prepared!