Most of the time successful investing is a waiting game.The coming 5 year period however may play out in a way  in which the normal rules of investing go out the window. What if we have a stock market crash, or if not a crash, an extended correction of the global stock markets?

Just as there are poor times to sell your investments, there are poor time to buy your investments as well. Charlie Munger said, “you don’t make money when you buy stocks, you don’t make money when you sell stocks, you make money while you wait”. This last 9 years of prosperity has been floated by one of the biggest global economic experiments that we have ever witnessed. Central banks have printed money, squashed interest rates to never seen levels, and everyone has loaded up on debt –  individuals, corporations, governments…everyone.

All of this stimulus was structured and concocted to escape the 2007 Credit Crisis. It makes sense that we are now significantly more indebted now, but where has this low interest borrowed money gone…? A significant portion of it has gone into the stock market, property markets and other highly speculative investments. After all, when rates are so low it takes only a small hurdle to make money with borrowed funds.

Until they start to rise that is.

Sitting on cash while you wait for a better opportunity is often one of the best investment decisions you can make. But often it is largely ignored. At times when the market is hitting extreme optimism and near all time high valuations people are getting excited about this to the extent that some are even borrowing money to get in on the act. These factors scream to me that we are nearing a market top – Index investing without scrutiny of valuation or risks, corporations borrowing money at low rates and buying back their own shares.

Smart money, (big time investors), and the best in the world, are currently moving their holdings to cash and are not making new investment purchases. With the likes of Warren Buffet holding 116 billion in cash, you have to ask yourself…why? With the market going up shouldn’t he be investing all of it.

If there are no decent opportunities, cash is the best short term holding. So what is flowing into the stock market currently is “dumb money”, the stragglers, the fear of missing outer’s. These late to the party investors are currently paying exorbitant prices for investments they will likely not generate a return on for a decade. When the likes of Ray Dalio of Bridgewater Capital fame (the largest investment fund in the world) vocalises that it may not be the best time to enter the market – you should sit up and listen. Ray states that we have a 70% change of going through a huge recession and market crash in the next 24 months. The smart investors want cash for the ability to buy up with handfuls when the stock markets crash and much lower prices present themselves, as they always do.

We live in a boom and bust world which has thus far never failed to live up to its busts. Usually we have a significant Bear market every 6-7 years. We are currently stretched to around the 9 year mark in the current cycle so history shows we are likely due a drop, crash, pop, whatever you want to call it…soon.

Holding a significant amount of cash in your portfolio or superannuation is not an easy decision, if the markets move higher cash can be a painful place to be, especially with rates so low. But, during extreme periods and before the market crash such as now, cash could be your best opportunity.

 

Is the stock market on drugs?