A Meltdown Is Coming... Here's What to Do

Most people simply accept that a "bear market" doesn't begin until the market is down 20% or more.

But if you start fiddling with charts and spreadsheets, you'll find that popular definition isn't worth much. After all, is it only 20% from an all-time high? That's not very useful in a period like the one after 2009, when stocks took nearly a decade to reach new highs.

In spirit, we want to define a bear market as "a period of prolonged negativity in the stock market, of such a magnitude that you'd like to have a plan in place to prepare for it."

We've found a definition developed by Ned Davis Research that identifies the right kind of dips in the market. It's a little complicated, so in simple terms – if the market drops far, fast or takes a lesser decline but over a sustained period... then that's a bear market.

We applied this definition to the S&P 500 Index and noticed a couple things...

First, we found that markets climb slowly and for a long time, then correct quickly. The bad times last about one-quarter of the duration of the good times.

The other thing we noticed is that bull markets tend to end in "blow off" tops. Markets don't roll over slowly... Rather, we see investors getting worked into a frenzy and sending stocks soaring before it all comes crashing down.

That meltdown is where most investors are going to see their portfolios hurt the most. And the next bear market may be harder to navigate than ever before.

If you're watching the S&P 500 Index hit new highs and thinking that I'm just trying to scare you... look at it this way...

You wouldn't wait to buy hurricane insurance until a storm is bearing down on your house. It's too late by then. No one would sell it to you. It's the same story with your investments. You don't want to wait until the ultimate crash to take defensive action.

Now is the time to start preparing.

That's why I highly recommend you set aside next Wednesday night, May 15, to watch Stansberry Research founder Porter Stansberry's Bear Market Survival Event.

You can tune in right from your home computer. It costs nothing to attend. And if you take part, Porter will send you a detailed Bear Market Survival Blueprint just for showing up.

But you must RSVP in advance to secure your spot by clicking right here.

Q: A question I have about one of Doc's recommendations. Muni bonds. Do you not put much credence in all the info out there about local governments unfunded pension problems that may force them into bankruptcy or at least to a lower credit rating which would be problematic for muni bonds, would it not? – C.M.

A: Do we wish municipal budgets were in better shape? Of course we do! But the bonds aren't backed by the money in the city coffers – they are backed by the power to tax.

Defaulting on bonds is a major disaster for a city or state. They won't be able to borrow again in the future. That's why they'll do nearly anything to avoid defaulting... and it's why defaults are exceedingly rare. Even if we do see defaults rise a bit, muni bonds are still one of the safest asset classes you could own.

Q: I have sold some stocks to be in cash. The funds are in the money market. Is this safe in the event of a market crash? – R.D.

A: It depends on the type of money market...

A money market deposit account is an FDIC-insured product that you'll find at your bank. FDIC insurance means that even if the bank makes disastrous loans or a bank manager absconds with the money in the vault, the Federal Deposit Insurance Corporation will make depositors whole, up to $250,000.

And these accounts are liquid, meaning you can access your cash almost instantly via online banking or at a branch office.

When you branch out into money market mutual funds (MMMFs), like what you'll find at your brokerage, you do not have an FDIC guarantee. You now face the risk of loss – however small. You have become an investor, and not a saver.

That's not how MMMFs are sold, though. They are sold as ultra-safe places to hold your cash savings. And MMMFs are exceptionally safe... until they aren't.

MMMFs use a wide range of securities to generate their returns. There is a massive market of short-term securities that you've likely never explored.

They use securities like short-term Treasury bonds and T-bills, but they also use things like overnight repurchase agreements, or repos. This is a complex system whereby a bank will borrow $99.99 overnight and pay back $100 the next day. Of course, this is happening on the scale of trillions of dollars.

This system is called the "shadow banking" system. It works well almost all the time. But when things go wrong, there's trouble... like the 2008 financial crisis.

So if you're looking for a safe place to store your cash – away from the market – look for insured deposit accounts like checking and savings accounts with banks.

Q: Can you recommend a number of safe or good index funds to invest in for long term? – R.T.

A: Index funds are simply mutual funds that managers have structured to follow a certain index. An index is a set of stocks like the S&P 500 Index, which tracks the top 500 largest U.S. stocks. The benefit of index funds is that they have low fees and little, if any, management. So you won't be paying a trader to work on it. It's a good way to keep your fees low.

The downside is that many index funds contain stocks that you probably don't want to own. Or their rules – like owning more of bigger, potentially overvalued or dangerous companies – might not fit your investment goals.

For example, Stansberry Research senior analyst Bryan Beach recently warned about new initial public offerings being "force fed" to millions of unsuspecting Americans via index funds in the Stansberry Digest:

The S&P 500 Index includes subjective criteria that will keep both Uber and WeWork out. But other index behemoths – like the Russell 3000 Index – contain no such protections.

To avoid exposure to ticking time bombs like Lyft, WeWork, and Uber, make sure you understand the indexes behind your index funds.

Index funds can be great places for investors to start... Just make sure that they fit your investment objectives. I've written before about Vanguard's low-fee index fund offerings and Fidelity's "Spartan" brand of index funds – they're both great places to start. (On a side note, while at Goldman, I helped Fidelity set up its Spartan funds decades ago. My group spent time teaching it ways to use derivatives to streamline its money-management processes.)

The kind of index fund you invest in depends on your preferences and what you need in your portfolio. And believe it or not, Wikipedia has probably the best free list of index ETFs. View it by clicking here. You can research the funds' objectives and their fees by going to the management company's website.

Keep sending your questions, comments, and criticisms our way. We read every e-mail... [email protected].

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Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
May 10, 2019