Editor’s Note: This article was written by Kevin McHugh.
There will be a stock market crash in the future. This could be tomorrow, next week, or next year, but do know that I properly warned you!
Before selling my investing book regarding my fortune telling abilities, I must let you in on a secret (it’s actually industry wide!) I don’t know when a crash will be and neither does anyone else because they are sporadic and unpredictable.
In 1987, portfolio insurance, which was intended to protect investments from crashes actually caused a 20% one in a single day known as “Black Monday”.
Homeowners, in 2008, were defaulting on their mortgages and caused a massive crash that decimated the banking industry and any portfolio with such holdings.
In 2020, investors were quick to sell their investing holdings after COVID-19 disrupted brick & mortar businesses, dismantled supply chains, and seized global trade.
All of these crashes have two things in common: first, every crash is exacerbated by fearful investors selling off their positions. Second, no one accurately predicted when and why such crashes would occur. Third, anyone claiming they did is an opportunist in the similar vein of someone trying to sell you a retirement plan with the new and improved Enron company.
This is not to discredit warning signs or indications that could cause stock market crashes, but it is important to not blindly rely and trust the expertise of stock “experts.”
To further show the ineffectiveness of stock analysts, there was a study, showing that blindfolded monkeys picked better stocks and performed better than actively managed portfolios run by experts. This is not to discredit experts or stock analysis, but to show you how stochastic the market can be.
With many professional investors having trouble beating the returns of the S&P 500, it may behoove investors to invest in the benchmark index instead of trying to beat the market. With the average annual return of the S&P 500 being about 8%, an investment of $100 a month would yield you over $150,000 over a 30 year period.
Skip the headlines and invest in what works, trust data not people.
Kevin McHugh is an M.B.A. student at The University of Baltimore, received his Bachelors in Finance at University of Baltimore, and is the founder and CEO of Bloombox.
*This article is for informational purposes only and does not intend to replace professional advice. It is important to consult with a financial planner and conduct your own research before investing.