THE BLOG
05/21/2014 04:29 pm ET Updated Dec 06, 2017

What If You Cannot Afford to Be Hit by the Next Stock Market Crash?

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The stock market is going to crash one day, of that you can be sure. Stated another way, Morgan Housel recently wrote at the fool.com: "Markets crash all the time. You should, at minimum, expect stocks to fall at least 10 percent once a year, 20 percent once every few years, 30 percent or more once or twice a decade, and 50 percent or more once or twice during your lifetime. Those who don't understand this will eventually learn it the hard way."

Well said. The question is, "How will you deal with it?"

Conventional investing wisdom says that "buy and hold" wins. Be methodical and not emotional as to avoid buying high and selling low. The power of compounding is a powerful thing. There is no question that this approach works. Increasingly, though, I am seeing a growing gap between this approach and what investors need or want.

Bucking Convention

Some investors remain skeptical of this economic recovery. Others are critical of our nation's political leadership. The most iron-clad reason for portfolio conservatism today is having a shorter-investment time horizon. This includes the millions of baby boomers who will be retiring every year for the next 15 years. Whatever the motivation, huge numbers of investors do not want to blindly endure "staying the course" in the face of the next bear market. Been there, done that -- and it hurt. Rather, many are willing to sacrifice some upside in order to protect against the downside because they can ill-afford to take a severe hit to their portfolio. It is worth mentioning that asset protection goes beyond your investment account, it can preserve your health too.

I'm Okay, You're Okay

If you feel this way, take comfort that you are not alone. Investors, both large and small, are in search of stability over volatility. According to Hedge Fund Research, the first quarter of 2014 marked the seventh consecutive quarter of record-breaking net growth for hedge funds, pushing hedge fund industry assets to a new peak of $2.7 trillion. Similarly, net assets in variable annuities reached an all-time high of $1.87 trillion. Indexed annuities grew sales by 17 percent, representing 46.3 percent of all fixed annuities sold in 2013. By the way, if you are in the market for an annuity, please read our Impartial Annuity Reviews before you buy.

Nervous Time

Billionaire David Tepper, founder of the $20 billion hedge-fund firm Appaloosa Management LP, recently said, "I think we're OK," of the current investing climate, "but listen, there's times to make money and there's times not to lose money. This is probably (a time when) you're supposed to think about preserving some of your money. If you're 120 percent invested, it's probably too much. You can still be long, but you probably should have some cash." Notably, Tepper told CNBC he reduced his equity exposure to 60 percent from 100 percent six months ago.

Even famed index investor John Bogle whose approach to investing is defined by simplicity and common sense recently advocated a tactical approach. In a recent ETF.com interview, he spoke about actively moving 15 percent of his own portfolio between equities and bonds. Although he remains a big proponent of buy-and-hold investing, he has, within the last 13 months, warned investors to "prepare for at least two declines of 25-30 percent, maybe even 50 percent, in the coming decade." If a billionaire earmarks 15 percent of his portfolio to be defensive, one might assume that a smaller investor would need a larger percentage to adequately seek safety.

Financial Hurricanes

The great thing about investing is that there is not one right way to do it. Tepper's approach is certainly very different from that of Bogle. The conclusion is that it is okay to do something different. With my firm's Index Equity Plus strategy, we believe that there are times to position your portfolio for growth and other times when preservation is key. Just like with severe weather, there are going to be extreme circumstances that warrant boarding up the house and evacuating temporarily. Hurricanes are not a daily phenomenon, but it pays to pay attention during hurricane season!

If you cannot afford to be hit by the next stock market crash, manage your assets differently. In my opinion, especially if you are a retiree or soon-to-be retiree, avoiding a financial storm means a lot. Contrary to what the industry may tell you, cash and Treasury Bills are not always a bad thing. 2008 reminds us that there are times when it is best to be standing still, and sleeping well.

This post originally appeared at the Runnymede Blog.

Are you taking any steps to protect your portfolio? Has your philosophy changed since the financial crisis?