It was a scene I’ll never forget. Gary Sinese played a double-amputee in the 1994 movie, Forrest Gump. Lieutenant Dan, played by Sinese, hollered into the wind of a storm. He was bouncing around in the crow’s nest of a shrimp boat that he ran with Forrest Gump.
“Me, I was scared,” said Tom Hank’s famous character. But Lieutenant Dan yelled, “It’s time for a showdown! You and me! Come and get me! You’ll never sink this boat!” He was supposed to be yelling at God, who appeared to eventually lend a hand to the hapless duo. The storm destroyed the other shrimp boats in the harbor. With no competition left, Lieutenant Dan and Forrest Gump soon caught plenty of shrimp and earned a fortune.
In a similar way, the next stock market crash will destroy plenty of investment boats. The seas have been calm. In fact, only one other time in history mirrors the previous nine years.
From 1991 until 1999, the S&P 500 recorded gains every single year. That’s nine straight calendar years. It’s still an all-time record, dating back to 1928. But the 33 months that followed tossed a lot of money overboard. A $10,000 investment in the S&P 500 on January 1, 2000 would have dropped to just $5,747 by September 30, 2002. If it were invested in the tech-heavy Nasdaq, it would have dropped to just $2,235.
It’s a sobering chart that might bring a touch of déjà vu.
If U.S. stocks can maintain their current level, they’ll once again repeat their nine-year winning streak. The S&P 500 recorded gains in 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016. As I write (July 6, 2017) U.S. stocks are up 10.9 percent this year. The Nasdaq, as it did in the latter part of the 20th century, is sailing full-steam ahead. It’s up almost 17 percent.
But storms will hit the markets. Winning streaks don’t last forever. The question is, will you be ready for the stock market storm?
After a string of good years, many investors get used to calm seas. Many cease to maintain their investment boats. They give up on bonds because stocks are leaving them far behind. Others chase winning sectors with delusional confidence. They add increasing sums of money to individual growth stocks or a Nasdaq index fund.
One of my friends is in that boat. He owns just four stocks. But over the past nine years, Lady Luck steered him into some rip-roaring currents. His portfolio left the S&P 500 far in its wake. His four tech stocks are currently worth about $3.2 million. My friend doesn’t own bonds. He doesn’t own real estate. Like a Shrimp Boat captain who’s making a killing every day, strong returns have seduced him. So far, despite my pleas, he hasn’t diversified. I don’t think he will.
I don’t know if the markets are going to sink him. But hubris sneaks up when we mistake luck for skill. Here’s how to protect your money from the next market storm.
Ensure that you own a diversified portfolio of low-cost index funds. It should include U.S. stocks, international stocks and investment grade bonds. This toughens your hull when storms batter boats. It could also lead to some strong, post-storm returns.
It’s also important to keep a steady hand on the wheel. Don’t be afraid when the markets drop. Rebalance once a year. That might mean selling some of your bond market index (which floats better during market drops) and putting the proceeds into your sinking stock market indexes.
This is the part that foils most investors. They speculate. They listen to other people who speculate. They often sell at a loss, buying in later at a higher price. Instead, when the markets fall, remember Lieutenant Dan. Like the brazen Vietnam vet, just yell: “It’s time for a showdown! You and me! Come and get me! You’ll never sink this boat!”
During the next market crash, your boat will dip. But it’s not going to sink if you keep a steady hand. Just be kind when you see other people’s storm-wrecked boats.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.