It was nice while it lasted…
After a brief respite in the second half of May, the bear market is back. The S&P 500 and Nasdaq 100 have now been down in nine of the last 10 weeks, and the Dow‘s in similar shape.
Perhaps the worst aspect of all is that there’s nowhere to hide.
Stocks are down, but so are bonds, gold and cryptocurrencies. Considering inflation is clocking its highest readings in four decades, cash itself is looking suspect.
It gets worse.
My nine-year-old son informs me that even blue-chip Pokémon
OK, I might have made up the part about Pokémon cards. But you get the point. It’s nasty out there.
We understand the “why.” If a rising tide lifts all boats, a falling tide will have the opposite effect.
The created a bubble in everything when it gobbled up $120 billion per month in bonds for two years. As the air is let out of the bubble, we’re seeing the prices in everything get right-sized.
Understanding what is happening is the easy part. Navigating it is trickier. But with a little discipline, it’s doable.
Today, let’s go over a few rules that will keep you on target.
New Set of Rules
One of my favorite stories is that of Canute, the Viking king of England. To prove a point to his court, he had his throne moved to the coast, where he commanded the tide to stop, lest it get his royal feet wet.
Alas, the tide did not obey his . It was a theatrical way of showing his courtiers he was just a man, not a god.
You won’t be any more successful in commanding the stock market than Canute was in commanding the tides.
Instead, focus on what you can control:
- Follow your stop-losses and sell when they tell you to sell.
- Keep a little more cash on hand than usual.
- Focus on alternative moves with your cash.
Let’s touch on that last point today.
Smart Cash Move No. 1: Bolster Your 401(k)
I squirrel away cash into my 401(k) with religious zeal. My goal is to max out my and my wife’s 401(k) every year. Today, a large chunk of my 401(k) is sitting in cash and non-market alternatives.
I may not be investing that cash at the moment, but I am saving it to invest when the time is right.
I can’t control when the market presents a good entry point. But I can get the cash ready to deploy when it does.
There are also things we can do outside of the market with our cash right now.
Smart Cash Move No. 2: Pay Your Debts
Interest you pay on debt is a negative return.
Paying down a loan — thus reducing the balance subject to interest — is as valid an investment as any. Not paying $100 in interest on debt I owe is every bit as valuable as earning $100 on an investment.
Sure, paying down debt doesn’t make strict financial sense when inflation is effectively doing that for you. But there is also a peace of mind that comes with being debt- and payment-free.
If you hit a speed bump and lose your job, have unexpected medical bills, etc., having less debt allows you to breathe easier.
Plus, if you have non-mortgage debt such as credit cards, you’re likely paying a lot more in interest than you can hope to earn in a typical stock-and-bond portfolio.
Smart Cash Move No. 3: Mortgage Matters
And what about the mortgage? Does it make sense to prepay it if you only pay 4% to 5% interest?
Yes, assuming the cash is sitting around, and you don’t have a more profitable immediate use, particularly if you are still in the first five to 10 years of the mortgage.
Making additional payments early in the loan’s life can take years off the mortgage. That could be the difference between retiring early and having to slog it out for another several years.
Bottom line: Of course, there are still opportunities out there, so be sure you keep some of your cash on hand.
And if you are looking beyond this bear market to the future, you need to check out Green Zone Fortunes.
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