In Barron’s, Mark Hulbert tells readers to Stop Worrying About the Stock Market Crashing! While the risk of a crash is not zero, he notes, the average investor is almost certainly more worried about a crash than is justified by the data:
“On average over the last three decades, respondents believed there to be a 19% risk of such a daily plunge in the subsequent six months. Though the average probability varied over time, in no single survey did it drop into the single digits. In the most recent survey it was 22.2%, above the historical average . . . Given that there have been more than 32,000 trading sessions since then, the judgment of at least this swath of history is that in any given six-month period there is a 0.79% chance of a daily crash that severe.”
He also adds a few good rules of thumb:
• No one can confidently predict when a crash may occur, regardless of what they might claim. So the best you can hope to do is insure against tail risks by purchasing one of the myriad products Wall Street has created in recent years. But bear in mind that the insurance carries a cost: You will forfeit longer-term returns.
• It’s therefore OK to “self insure”—provided your investment horizon is at least 10 years. You save the premiums of disaster insurance, and 10 years is most likely more than enough time for the stock market to recover. It may even take a lot less than 10 years, in fact: It took just nine months for the dividend-adjusted average stock to make it to its pre-1987 crash level. In 1929’s case, it took just six months.
• As your investment horizon shrinks as you approach or are in retirement, you should be diversifying your equity portfolio into other asset classes that have low correlations with the stock market. That way you will become less and less vulnerable to a stock market crash.
Go check out the full column.
Stop Worrying About the Stock Market Crashing!
Barron’s, May 20, 2016