Enjoy the Rally But Be Prepared For a Drop

As you might have noticed, the stock market is doing quite well this year.  There were no major new international crises, and even the recent debt ceiling negotiations failed to spook the market.  Accordingly, there was no significant correction this year.  Rising stock prices are great news for investors in or nearing retirement, but they are not good news for young investors.  A net buyer of anything, such as cars, milk, or stocks, would much rather pay less than more for whatever he or she is buying.  But these investors will surely get their chance.

Note that I am not predicting an imminent correction.  In fact, I believe that the market is still somewhat under-valued.  But my opinion is beside the point.  And the point is, the market drop will come.  There is no complete certainty in anything in the investment world, but this is as close as it gets.  You can be assured that the market will drop in the future as well as you can be assured that a big snowstorm will hit Sierra mountains.  It may happen tomorrow, next month, or in a couple of years — but it will happen.  This is just the nature of the beast we are dealing with.

So while we can all enjoy the market ride while it lasts, we should be mentally prepared for the decline.  When the time comes, don’t act on your emotions and don’t panic.  Instead, embrace the situation as your chance to buy great businesses at a discount.  That is how the bulk of the profits in the market is made.