I'm curious why one wouldn't just move 100% into cash if you are expecting a crash. The S&P500 index fund would go down for a while in the case of a crash, right? I'm struggling with this now so any insight would be helpful.
> I'm curious why one wouldn't just move 100% into cash if you are expecting a crash. The S&P500 index fund would go down for a while in the case of a crash, right? I'm struggling with this now so any
If you knew exactly when the crash was going to happen, yes, that's what you should do. It's very hard to predict though, since you have to be accurate multiple times:
(1) When the crash starts
(2) How long it's going to last
(3) Whether it's inflationary or deflationary
You could for example have a crash in real terms (inflationary), for example, where cash is worse than the market - let's say the market goes up 5%, but inflation runs at 15%: that's actually a drop of 10% in real value, but cash actually drops 15% in real value, so stocks are still "the better loser" in that case.
In a nominal (deflationary) crash, it is better to go to cash, but you still have problems (1) and (2) to deal with that make timing things very difficult. You could, for example have said in April 1998 that "there was going to be a crash in tech soon" - and you'd be right, but only after sitting on your hands through 2 more years of craziness and missing out on 150% more gains before the crash actually came. Most people wouldn't be able to handle that.
Putting away a little every month will get you better returns than having cash on the sidelines waiting for the dip, even if you know when the dip will happen ahead of time:
Of course you don't know when the dip is going to come. So you have to pull out some time before (close to) the exact day that things start tanking. And then you have to get in on the exact day of the bottom, because the 'best days' for returns are often soon after the 'worst' days. And if you miss just a handful of the best days, your returns tank:
Of course once people are (usually completely) out of the market, they have a hard time jumping back in psychologically, and there's an opportunity cost to sitting on the sidelines:
I don't believe anyone can time the market continually well. The book "Anti-Fragile" by Nicholas Taleb does a good job of illustrating the idea that you want a portfolio that will _increase_ by randomness. I do have a large percentage of the portfolio in anti-fragile areas (a type of hedging).
While I'm certain a crash will happen, it might be another year, which could have a ton of gains in it, or it could be tomorrow.
If you knew exactly when the crash was going to happen, yes, that's what you should do. It's very hard to predict though, since you have to be accurate multiple times:
(1) When the crash starts (2) How long it's going to last (3) Whether it's inflationary or deflationary
You could for example have a crash in real terms (inflationary), for example, where cash is worse than the market - let's say the market goes up 5%, but inflation runs at 15%: that's actually a drop of 10% in real value, but cash actually drops 15% in real value, so stocks are still "the better loser" in that case.
In a nominal (deflationary) crash, it is better to go to cash, but you still have problems (1) and (2) to deal with that make timing things very difficult. You could, for example have said in April 1998 that "there was going to be a crash in tech soon" - and you'd be right, but only after sitting on your hands through 2 more years of craziness and missing out on 150% more gains before the crash actually came. Most people wouldn't be able to handle that.