What if the apocalypse is delayed once again? What if the depression turns out to be a nasty recession? We don’t have the definitive answers, but we know how to ask the questions and consider the odds.
When the last investor has sold, when the appetite for risk has completely vanished, the markets will bottom and the cycle will turn in earnest. Deciding in advance when that moment arrives is an inescapably speculative venture, and investors with weak constitutions will want to avert their eyes, and portfolios. For everyone else, it’s time to go to work.
That starts by recognizing that waiting for a clear confirmation that the turning point is here is likely to miss the big gains that typically come in the early weeks and months of the eventual rebound. Navigating those two extremes is a big fat slice of risk. Finding a reasonable balance, which differs for every investor, is the core of the investment challenge at the moment.
The generic solution is to keep the risk allocation of the portfolio fully invested, through thick and thin, boom and bust, while keeping a stash of cash. Of course, that doesn’t feel so good when the bust actually arrives. Looking at long-term numbers is easy; weathering the day-to-day pain of a bear market, especially one as deep and devastating as this one, is sheer torture for all but the most disciplined of investors.