What to do right before the stock market tops out?

I think this nearly-10-year-old bull market will end soon. I have been wondering what the best investment strategy is in that situation.

I’ve looked at various articles online on how to invest before a crash or how to invest at the top of the market.

(Interestingly, no one advises getting out of the market completely.)

Here are the various strategies suggested by various market-watchers:

  1. Stay the course and don’t worry about short-term market ups and downs. You can’t “time the market” (guess exactly when it will go up or down), and over the long term the market will go up.

  2. Diversify your portfolio.

  3. Rebalance your portfolio slightly so it is somewhat heavier on bonds, which are a safer investment.

  4. Invest in recession-resistant stocks like dollar stores, fast food restaurants, discount clothing stores, and Wal-Mart or Costco.

  5. Consider “short selling” (effectively, betting that a given security will decrease in value within a given period).
    It seems to me that 1)-3) are ways of mitigating losses rather than profiting, while 5) is high-risk.
    If you want to bet on the market turning downward, isn’t there a better way?

If you’re confident in your ability to predict when the market has “topped out” and when it has hit “rock bottom” (good luck with both) then you shift completely out of stocks and into bonds at the top, and when it hits bottom you shift everything back into stocks.

Selling call options on stocks you own is a conservative way to profit or hedge your losses. Buying put options, perhaps on the S&P500 index rather than any specific stock, is a safe way to “insure” your portfolio, especially if you think the coming crash may be quite brutal.

You don’t mention your (4) which strikes me as a normal and proper approach. I’m not sure what sort of stocks to recommend for this, however. It would depend in part, I think, on the nature and reason for the coming bear market, if any. (A year ago or so, I asked Dopers to prognosticate on the specific nature of the next financial crisis, but got no takers. :slight_smile: )

ETA: But obviously any bet against the market, whether “hedge” or not, will lose money if the market fails to fall.

So, you want to make bets, but you don’t want risk? Good luck with that.

Have you read the story of the world’s worst market timer?

By definition, betting on the market falling is high risk. Unless you have some kind of superpower, you don’t know when the market will fall. More importantly, you don’t know when it will go back up, and missing out on a few crucial days can cost you most of the market gains.

1 is the only one with any validity for most people. If somebody really has market predicting skills they should do everything humanly possible to get a job doing it with Other People’s Money. And if you really have this skill, to pretty much any reliable degree, don’t ‘sell yourself short’, most professionals do not (most realize they don’t).

Except nobody knows the market will go up in the long term. We just know it has in the past and the chances of all an but exceptional few investors of predicting future market moves consistently are poor.

3 is not particularly valid as stated but suggests an unstated valid option related to 1 and 3. If the run up in the stock market has increased your % in stocks (which it probably has unless it was 100% to begin with) you should sell stocks to cut it back to what your original target % was.

Making an allocation change because you somehow ‘know’ the market is topping is again not wise particularly not for somebody asking a question like this to begin with, unless they turn out to be some kind of untutored savant. If OTOH thinking about yourself you’ve decided your risk tolerance isn’t what you though it was or specific situation of life makes it harder to absorb losses than it used to be, then cutting back on % stocks is always fine.

Back to ‘the market always goes up’, the practical pitfall of the ‘stay the course’ philosophy IME is that in practice, though not in theory, it tends to become associated with stock market boosterism. You see that IMO on the otherwise excellent forum ‘Bogleheads’ which I’d recommend at least ‘lurking’ at in general. The theoretical philosophy is ‘stay the course’ at the risk level that’s right for you. But a lot of the posters are perma-bulls with high stock allocations for their situations IMO.

It’s harder to actually digest the reality that we don’t know if everything will be OK in the stock market with ‘stay the course’. A lot of people seem to mentally revert to ‘stay the course because we know it will be alright in the long run’. No we don’t, we just don’t know a better course than taking some risk (meaning it might not work out well, or it wouldn’t be risk) investing in stocks.

Nitpick: If somebody really does have this skill, why would he/she want to enrich Other People? There’s a reason why Renaissance Medallion Fund, perhaps the very most successful hedge fund ever, was closed to outside investors.

Expanding on this, it may be wise to contemplate what you will do if the market starts crashing. If you think you’ll be inclined to panic and start selling after the market has already fallen significantly, that’s probably a good reason to reduce your exposure now.

I think it depends on how much you need that money to be financially secure, and how much time you can afford to let it ride in the market. In other words, if you are planning to retire using that money for funds AND you are retiring in 2-5 years, it might be prudent to shift your money into more conservative options. On the other hand, if you are able to wait several years or more, one strategy would be to diversify at least part of the funds into more stable options, wait for the crash, buy more stock (which is now at lower prices, using some of your proceeds from your bonds or what have you) and wait for the prices to come up. You’ll have bought low, and, hopefully, can sell high. You need time and patience to do this.

As others have said, however, the stock market is a bet. If you need your money, take it out.

As usual, it depends on your age and your goals. In 2008 I stayed the course and kept on investing (thanks to still having a job) and it came out very well for me. Now since I’m retired I’ve moved a lot of my aggressive investments into income producing and more stable funds, which are generating enough income to live on without touching principal.
One thing not usually mentioned - do you have any capital investments to make, like a new car or work on your house? If so, selling some high runners now might be wise. Borrowing could cause you a cash flow problem if your are affected by the coming crash, and using the money now for infrastructure, as it were, locks in your gains. I did this by accident in 2000, and while my tech stocks tanked my truck remained.

I have a number of stocks. On Friday I closed all my profitable positions. I’m still holding the positions that are down and as and when they cross over into profit I will sell those too. If the market crashes in the meantime I will lose lots of money on those, but as time goes on those will gradually reduce in number. My risk is already greatly minimised. If and when there is a crash I will buy lots more positions using the money from my closed positions. The trick however is to work out when the bottom of the market occurs. I think you could potentially get consecutive dips with short recoveries in between which might last a number of weeks. So I will buy back in a piecemeal fashion.

If a crash never happens then I will simply have missed out on profit. That might well happen as well.

I am going to do exactly what I did in 1987, 2000 and 2008. Nothing.

I had an asset allocation I was happy with, didn’t need the money for years and kept buying during the downturns. I ‘lost’ as much as 40% but it all came back in a couple of years. I am way ahead of a couple of friends who panicked and sold out too early and bought back in too late.

This time, I do need the money (retired) but my asset allocation is now aligned with that. I won’t have to sell stocks for years if they drop, if they don’t drop I will sell only to maintain my desired allocation.

Move to cash or cash equivalents. The old “move to cash and wait for the crash” strategy.

Seriously, it is one investment option that gets short shift, I guess because

  1. markets are hard to time
  2. cash returns are lucky to keep you even with inflation
  3. the entire finance industry only makes money if you are invested or if they can get you to trade

Yeah, after the principals built up loads of their own money in the fund via performance fees from outside investors, and presumably regular Wall Street bonus jobs before that. With any realistic level of skill (not Biff in Back to the Future and somebody gave you the stock year book for the next 20 yrs) you need to get paid a lot doing it with OPM, first.

Or you can move enough to cash to let you ride out a crash for a couple of years. Moving everything to cash seems extreme unless you get tomorrow’s newspaper that is.

This sums up what I’m doing. I’m very very smart about the stock market. Smart enough to understand how dumb I am, so I don’t try much in the way of short term thinking*. I am facing a situation where: a) the market appears to be near a top, b) I have a more-or-less normal asset allocation, and c) I am within months of retiring.

I decided that of those elements, I only have complete knowledge about ©. So I changed the retirement date and gave myself another two years to weather any drop. My best plan is to leave the money alone during (if) a recession and market drop, much like 2000 and 2008. FWIW, my AA is slightly more conservative due to my age, but this has nothing to do with the current highs.

*The only exception was a move to mostly stocks prior to the election, followed by some selling to remove/avoid debts. This worked out much better than expected, but I’m back to normal now.

I remember back in the 90’s when the DOW was in the 2000’s and rising. Every time it crossed a barrier like the next 500 or 1000, there was a lot of doom and gloom chatter about how it was too high and going to crash. I myself remember feeling like it was too high and I needed to get out. But my naturally lazy personality took over and I did nothing, and I rode the rise as it went up and up. I also rode through the crash of 2008 and rode this rise up.

I also know people who moved everything out of the market before the 2008 crash and they reinvested when the market was low. They did very well, obviously, but they also got lucky. I’m sure many people also pulled out of the market back when it was 2000, 3000, 4000,… etc because they thought a crash was imminent. There wasn’t a crash and they missed out on a lot of growth.

For a novice investor who is asking for this kind of advice, the proper strategy is probably just to leave it in the market. It’s natural to feel like the market is too high and is going to crash, but that’s probably your emotions being too worried rather than your brain reaching a logical conclusion.

I don’t know that this logically follows.

In order to get a job (or run a business) “doing it with Other People’s Money” you have to be able to predict the market year in and year out. It’s logically plausible that someone without this level of skill could still on rare occasions realize that the risks are currently tipped to one side or the other. A 10 year market boom might be a pretty good indicator that the risk is currently to the downside (especially, I might add, when combined with a rising interest rate environment), but that’s a pretty rare thing. Being able to “predict” the market on occasions like that doesn’t get you a job with other people’s money, but it might be helpful for yourself at such times.

I first started investing just before the 1987 crash and my clearest memory isn’t the drop, but how quickly everything started climbing and continued climbing thru the 1990s. I don’t much worry about the dips anymore.

If I felt like you, my strategy would be hold my current positions but hold off on putting any more money in. When the market “crashes” (takes a major dip) buy more of what I’ve already got while it’s cheap. You’ll miss out on the gains while you wait, but eventually you’ll be right.

Yep.

If you’re young, and putting money in the stock market for retirement, then you should welcome the occasional “crash.”