Full disclosure: I am a cautiously optimistic bear. But that means I'm a bear. I'm also self-aware and situationally-aware, which means that I'm a realist. I can see the writing on the wall, and it's not very encouraging.
If you are among the throngs of investors who believe that this historic bull market will continue another 1-2-3 years, nothing I say will dissuade you. If you're not sure where you stand regarding the future of the market, maybe I can help you.
And if you're a perma-bear (and BTW nobody will ever admit to being a perma-bear), then I implore you to listen to what I have to say. It might save you a lot of pain and anguish.
A recession and bear market are inevitable
Don't know when, don't know how bad, but it's coming. Does that mean you should take all your money out of the market right now and put it into something safe like gold or bitcoin? NO!
It only means that the prudent thing to do is raise some cash - maybe 20% for an investor who normally has 5%. That's a quadruple of their cash position. Not a casual switch, for sure. But I think it's justified.
Picking up nickles in front of a bulldozer
I believe that this bull market is not dead yet. I think it's more than possible that we will see at least a few more all-time highs in the S&P 500 before this bull goes into retirement. But here's the problem.
Does it really make sense to you to try and squeeze the last 5% out of a market, given the risk that you might be risking a 20% drop... or worse? I don't think so, and that's why I've been telling clients to start raising cash ahead of the coming bear market.
It's just common sense. When the market becomes over-extended, as it is today, investors who remain fully invested are making a bet that earnings will catch up to prices, and bring P/E ratios down to more normal levels. Well, that's an example of pinning your hopes on something good happening when it's not certain by any means that it will happen.
The closest analog I can find to today's market
Some of you weren't around in 2000-2002, but for those who were, I think we're headed in the same direction as we were back then. Why? Because in 2000 we were extremely over-valued, and investors were throwing money at anything that had a dot-com after its name.
We're not that over-valued today, but are you willing to wait for the valuation bubble to burst before you take defensive steps?
When the next recession/bear market arrives it will be painful. Investors who anticipate and build up a cash reserve will be in a much better position to pick up high-quality stocks at bargain-basement prices, like we saw in 2002.
Food for thought, for those who are interested in eating and thinking.
Disclosure: I am/we are long sh, tbt.
Additional disclosure: This article expresses my personal opinions and should not be taken as investment advice. Always consult your professional investment advisor before doing any trades.