If you’ve been following recent financial news, you already know that stocks are at an all-time high, and have been, with a few interruptions, for a couple of years now.
Whenever that happens, there’s inevitable talk about the price bubble getting ready to burst, which is a pleasant way of saying we might be in for a major, all-around drop in securities prices. For everyday investors, there are two related questions.
One, is a fall inevitable, and two, what should be done about it?
Here’s a summary of why the bubble is likely going to pop soon, and what you can do about it.
Betting on a Fall
If you think a correction is inevitable, one of the easiest ways to do well in a declining marketplace is to use derivatives of company stocks in order to profit from price drops. For example, derivatives like options and futures are a common vehicle for experienced investors to make money by predicting direction, regardless of whether share values go up or down.
Smart Money and Bubbles
Before the crash of March 2000, when the dot-com rally ended and saw major index prices fall by nearly 80 percent within the next two years, a few telltale things happened. First, rising securities prices weren’t backed by increases in output, sales, or real-world measures. They simply rose because panicky investors didn’t want to miss out on further increases. Plus, many institutions and banks were warning of a coming crash. In 2021, the situation is strikingly similar, with high prices unsupported by earnings or inherent value of shares. Another warning of a crash is heightened inflation and a volatile global economy.
Plan B: Getting Out
When prices get too high, many decide to take the gains they’ve already made and simply exit the marketplace. Some seek out other choices, like gold and cryptocurrency while others never come back. Another approach is going to cash now and waiting for the downturn, when plenty of bargains will be available.
Contrarian Thinking: Gold and Crypto
For some, the safe havens when stocks take a hit are choosing gold and investing in cryptocurrency. For decades, investors have been using gold to hedge crashes. But crypto is a relatively new version of the same strategy. The alt coin class held up well during the year of COVID and during other market downturns.
If your research and analysis lead you to believe that a bubble burst is just around the corner, consider using the dry powder strategy. The old term refers to holding nothing but cash in your account until after the burst takes place. Then, when you believe prices are close to a bottom, the strategy suggests using the cash to buy up under-valued corporate shares. This wait until after the crash approach is one that’s popular with many high-end investors and institutions. The tricky part is guessing when the bottom has been reached. In a double bottom crash, you don’t want to act too early or you’ll suffer losses when the second wave of the price drop off takes place.