The “buy the dip” financial news teleprompter readers and the 30-year-old portfolio managers who have never seen a market crash are insisting that stocks are still going to the moon. Market veterans and “Hey Boomer” professionals have seen this show before. In 1987, the Dow Jones Industrial Average plunged a stunning 22% in one day. Today, an equivalent drop in the venerable index would result in a collapse of an incredible 11,000 points.
So, where do we stand now? We could very well be on the precipice of a significant decline, like the one earlier this year, with all major indices trading at all-time highs. One thing is for sure: If inflation moves higher, the war in Ukraine continues to churn, the Middle East peace does not hold, and our crushing national debt, approaching $38 trillion, spirals more out of control, the path of least resistance will likely be down. Investors should consider some crucial items now, as they may have to prepare for another 2025 correction.
One positive is that consumers and businesses are generally in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the past few years, and the economic system is not teetering on the abyss as it was globally in 2008 when Bear Stearns and Lehman Brothers collapsed. To avoid a similar fate that year, Merrill Lynch was bought by Bank of America. While we are not hitting the panic button, when seemingly everyone on Wall Street is remaining perhaps too bullish, safety precautions could be in order now.
One positive is that consumers and businesses are generally in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the past few years, and the economic system is not teetering on the abyss as it was globally in 2008 when Bear Stearns and Lehman Brothers collapsed. To avoid a similar fate, Merrill Lynch was bought by Bank of America. So it makes sense to build a cash position like Warren Buffett has in anticipation of a correction. Matching current losses against gains, even if they are short-term, makes sense to help build up a cash supply. The proverbial dry powder may come in handy down the road.
Margin is the money borrowed from a broker to purchase an investment. When times are good, using margin loans to buy more stock is a bad plan for individual investors, especially when those margin positions are high-volatility momentum stocks. If the market collapses, a highly leveraged investment account could be destroyed.
