The other day I read a very interesting piece of data… if you look at the US markets over the past century or so, every strong rally has had some kind of dip at some point. There have been a dozen or so times where the markets have increased by 100% without a 20% setback. Just look at this chart:
Now take a look at that last column… At some point, we will have a major correction. On Monday, we had a good look at what markets could be like with almost everything plunging:
If markets were to decline by 30-40% or even more, there would be many more such days. If you’re doubting that it will be coming.. Just think about it. The markets are at all-time high’s but the economy remains depressed in many ways. Unemployment remains high both in the US and Europe, growth is not exactly what you’d call “strong” with the EU expected to contract again this year, a slowing China, etc. Banks around the world are struggling with some in Cyprus even funding their bailouts with their shareholders money.
Gold Might Not be Your RefugeA lot of gold bugs think it is the ultimate protection against inflation, falling markets, etc. It has been doing very poorly in recent weeks and broke past the psychological $1500 level:
So how should you prepare yourself? One clear way is to own dividend stocks which tend to do better than the overall market in market crashes/setbacks. I feel confident that a portfolio like the USDP would outperform the overall market in such a context.
Another question to ask yourself of course is how well you could support such a loss. Obviously, no one would be happy about such a loss but I think it’s important for everyone to be able to support such a loss. If you are retired or close to it, it’s important to be comfortable with how much money you have “at risk”, in the markets.