Predicting the Future: Will the Stock Market Crash in 2015 and What Could Cause It?

The never-ending cycle of speculation about when the stock market will inevitably crash can sometimes feel like a futile debate. The allure of predicting such events is irresistible, but it's a paradoxical question akin to asking whether summer will occur. While it's certain that a stock market crash is likely to happen, the timing and the cause are subject to much debate and analysis.

Understanding the Frequency of Market Crashes

Sinh Song, a renowned financial analyst, uses historical data to provide context on the frequency of market crashes. Since 1928, major stock indices like the SP 500 have experienced 10 percent or more pullbacks over 89 times, or about once every 11 months. This suggests that annual pullbacks are almost as common as summers, making stock market corrections a routine part of the investment landscape.

The Emotional Aspect of Investing

Investing is inherently emotional, and this emotional aspect can cloud our judgment. The panic-inducing nature of a market crash can lead even the most rational investors to act irrationally. This phenomenon is exacerbated by the human tendency to believe that the market should or will never crash, even though history clearly shows otherwise. The number of investors claiming to be market contrarians often vastly overshadows actual contrarian behavior, making the emotional aspect a critical factor in investment strategies.

Developing a Resilient Investment Plan

Given the inevitability of market crashes, it's crucial to develop an investment plan that can withstand these downturns. Instead of reacting impulsively during a crash, a structured approach based on predefined rules can help mitigate emotional responses. Here's a practical plan for navigating the next market downturn:

1. Capital Allocation Strategy

Assume you have $1,000 set aside for opportunistic investments, in addition to an emergency fund. Here’s a roadmap for deploying this capital:

0-10% decline: Reserve this amount for potential opportunities that may arise. 10-20% decline: Allocate a larger portion of the money, as this represents a significant but historically frequent opportunity. 20-50% decline: Deploy the maximum amount, as a substantial decline presents a rare and significant opportunity, but do so thoughtfully. 50% or more decline: Keep the smallest portion in reserve for extremely rare, large-scale downturns.

2. The Logic Behind the Plan

The reasoning behind this strategy is straightforward:

A 20% decline is a substantial drop but occurs frequently, making it a good balance between opportunity and probability. A 50% decline is extremely rare, making it a strategic move to be prepared but not overcommit resources to such a low-probability event.

Winston Churchill's Advice on Crisis Management

To manage the stress of market volatility, it's helpful to take a step back and think about long-term planning during times of uncertainty. Winston Churchill famously said, "Let our advance worrying become advance thinking and planning." This advice emphasizes the importance of preparing for potential crises before they occur, rather than panicking in the moment.

Conclusion

While predicting when and if a stock market crash will happen is a futile exercise, having a well-thought-out plan can make all the difference. By viewing market downturns as opportunities rather than crises, investors can make more informed decisions. Developing a structured approach, aligning it with historical data, and staying emotionally resilient can lead to better long-term investment outcomes.