The first crisp Fall day means many things to many people — light jackets, tall boots, football, the harvest Moon. But if you’ve been involved with Wall Street for any decent stretch of time, it means something else. Fear.
And if you don’t feel it, you should. It’s smart to learn from your mistakes. It’s much smarter to learn from other people’s mistakes. There’s a non-zero chance we have another bad fall day ahead of us; prepare now.
Black Monday in October 1987. The Asian Contagion of October 1997. The dot-com bubble/9-11 fallout of September 2001. The housing bubble collapse of September 2008. And, lurking somewhere in the history books, Oct. 29, 1929. What is it about the Fall and investing? There are some interesting theories: the end of summer renews brings renewed focus on harsh realities of the business world; the agrarian cycle and harvest season do the same.
Folks who know the numbers know the so-called September Effect is hardly cut and dried; in fact it’s so vague that it’s also known as the October Effect. September is in fact the least-good month for stocks, but there have been plenty of fall months when stocks end up in the green. Still, the memory of those awful fall days is too strong for people who lived through them. And those who haven’t — well, somewhere out there is a very bad day for stocks, and for you. I want you to be prepared. Particularly because there are flashing red warning lights all over this economy. The bond market is screaming at you to pay attention.
And so, I’m about to give you advice that is entirely non-controversial; every financial advisor would say something similar, if perhaps not as direct: if you have any money invested in the stock market that you’ll need in the next five years or so, start cashing out. Do it in a logical, measured way, but start cashing out.
When the AI-bubble, oil over $100 a barrel, 5% 10-year Treasury notes, crypto-bro bill come due, there is going to be pain. And it’ll be too late to act then. (Pro tip: In fact, you might wish you had some cash lying around to take advantage of what will be a buying opportunity!)
Perhaps you don’t think you’re exposed to this; you wisely invest in something like an S&P 500 index fund. Sadly, given the concentration of big tech in such funds, nearly 50% of your value could be directly tied to AI. If you want to be safe from an AI crash, you’ll need to cash out.
I’m not just talking about people on the verge of retirement. I’m looking at you 50-somethings who might lose their jobs and have a really hard time getting a new one. Even 40-somethings might find themselves in that unforgiving spot. And, Heaven forbid, anyone who thinks they might want to buy a house or pay for a kid’s college — de-risk now.
And don’t think bond funds are the safe way to go; owning bond funds is nothing like directly owning U.S. Treasuries, which are relatively safe. If you need cash in the next five years, you need to have that money *in* cash or something very much like cash, with the boring gains that come with that. Don’t do it all at once; move the money in stages, in a dollar-cost-averaging kind of way, to smooth out the edges of market whimsey. Talk to a professional if you don’t know how to do that. But think about any cash you’ll need in five years and make sure it’s not tied up in the whims of Sam Altman, Elon Musk, or the Iran war.
Why five years?
Market corrections always happen; they vary in depth and length. So do our memories. Our most recent “bull market,” during Covid-19, lasted well under a year. So one might be tempted to think that’s the model. But that was quite an exception. So here’s a quick history lesson for perspective.
In September 2007, the S&P 500 was hovering around 1,500. We know what happened next. Five years later, investors were *still* down about 20 percent. Those 2007 investors didn’t see any real gains — the S&P 500 didn’t leave 1,500 behind — until the summer of 2013. Now, that’s a worst-case scenario, but if you look at a chart, you can eyeball that people who put money into the S&P 500 anytime in the aughts didn’t do well until well into the 2010s.
Look at the previous bubble burst and you’ll see an even scarier story. At the dawn of the 21st Century, the S&P 500 peaked at — nearly 1,500. Then the dot-com bubble burst and 9/11 followed. Stocks stuttered for about three years, then clawed their way up again, back to about 1,500. Then….well, see above. Or below.
So, my five-year suggestion is on the random side. When you talk to a professional about how to secure cash you’ll need in the next (you pick) amount of years, that professional might yell at you for reading this story, but the only real disagreement is the time horizon. In my opinion, you should really have any cash you’ll need in the next 10 years socked away in something very conservative. I say five years as a concession; someone else might recommend a shorter or longer time span based on your age and your ability to recover from a crash.
Also, to be clear — if you are 60 — hopefully, five years from retirement — you don’t need every penny of your investment in cash. With any luck, you’ll still be earning returns on your investment for another 20 or 30 years, and you should still be aggressive with that portion of your money. You should be in cash only for the money you’d need from 65-70 or so.
No one can tell you when a crash will happen. I think it’s quite possible it will be postponed until after the midterm elections — there certainly is strong government incentive to put it off. But no one person or government agency can really control the animal spirits of Wall Street. And no one can contradict gravity or the bond market.
While the long history of stocks is a slow, upward climb, and I fully believe in investing, I also believe in reality. Markets can’t go straight up. Companies can’t invest billions of dollars for millions in returns forever. Eventually the bill comes due. Be safe.
For more reading, this Morningstar piece does a great job of putting 150 years of market corrections into perspective. And there’s a tidy list of the worst 20 bear markets and how long they’ve lasted.
And here’s a good, even-handed story on the October Effect.
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