I am asked daily about the timing and potential for the next
stock market correction or crash. While I may not be as smart (or as
marketing savvy, truth be told) to accurately predict the next stock market
downturn, I do have a plan to prepare for the next time U.S. stocks fall in
I dont think there will be a stock market crash in 2021.
From my reading, the forces that will push the stock market higher are greater
than those that would cause a decline. But I could very well be wrong.
It is important to understand that not every stock market
downturn is a crash. Technically speaking, a market decline would be classified
as either a correction or a bear market. If the market drops (as measured by
the broad stock market indexes) by 10% to 20%, the decline would be called a
correction. It becomes a bear market when the drop exceeds 20%. You dont need
a bear market to feel very uncomfortable about a stock market correction.
Consider that a 15% decline turns a $100,000 account into $85,000. No one would
like to see that on their brokerage statement.
As to timing, an actual bear market happens on average about
once per decade. The market experienced a sharp bear market in early 2020, but
with a quick recovery. Corrections come more often, with a drop of more than
10% occurring about every other year. However, it is not uncommon to see a
correction every year for a span of two to three years consecutively.
The averages indicate we may very well experience a stock
market correction between now and the end of 2022.
My investment strategy focuses on building a dividend income stream. Investing with this approach turns market downturns into something from which to benefit rather than an event to fear. My subscribers and I understand that lower stock prices let us load up on shares with higher-than-typical yields. Dividend Hunter readers view market corrections as opportunities. Buying shares on-sale boosts an investors income stream for the rest of their life.
For the next correction, I want to have some dry powder.
However, because I dont know the timing of that correction, I also dont want
to have a large chunk of money in cash, earning zero percent.
Instead of selling a bunch of stocks and hoping for a
correction (how much lousy karma is that?), I have a moderate amount of money
in a safe but interest-paying investment, and I add a small amount of money to
that investment every month. The longer it takes for the next downturn to
arrive, the more dry powder I will have to put to work. I dont have to sell
any investments now, which would cut into my dividend income stream.
I fund the dry powder account out of my monthly
contributions into my investment accounts. A portion of the deposits get
invested in income stocks, and a part goes to the dry powder account. This way,
my income stream keeps growing, and I will be ready to take advantage the next
time stocks go on sale.
If you are curious, I use a short bond ladder for the dry
powder using the Invesco BulletShares bond ETFs. They are nifty bond funds that
let you benefit from rising rates, which is the opposite of what happens with
most bond funds.
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