Many investors are pretty convinced that we're in a stock market bubble, where share prices are extremely inflated and stocks are incredibly overvalued. I happen to agree.
The problem with stock market bubbles is twofold. First, it's hard to invest when stock prices are up. Secondly, bubbles eventually burst. That may very well happen in the not-so-distant future, and it surely has a lot of investors worried. Here's why I'm not sweating an upcoming market crash at all.
I'm invested for the long haul
If you're within a year of retirement, it could pay to cash out some stock investments while they're up, before the bubble bursts. Keep in mind that if you do this in a retirement plan that isn't tax-advantaged, like an IRA or 401(k), there may be tax implications. Still, paying capital gains could be preferable to suffering losses in your portfolio when you're on the cusp of leaving the workforce.
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I, however, am nowhere near retirement, nor am I planning to cash out my stock investments anytime soon. An imminent market crash only means that my portfolio value is apt to take a temporary hit. If I leave it alone, however, and wait for stock values to recover, I shouldn't lose a dime.
I've protected myself from having to liquidate investments
Financial emergencies can strike at any time. I'm not totally blase about seeing my income take a hit if the current economic recession continues. But I've also done my part to protect myself from periods of financial instability by socking away a year's worth of living expenses in the bank.
Some might say that a year's worth of bills is extreme. After all, most financial experts agree that an emergency fund with enough money to cover three to six months of essential expenses will more than suffice. Plus, the more money I have tied up in cash, the less I have to invest at a much greater return than what my bank account is paying me (especially these days).
Still, having that more robust emergency fund allows me to be a more confident investor. For that reason alone, it's worth it. Besides, as a self-employed writer with a variable income, I need to have more protection than your average worker. The last thing I want is to have to tap my investments when they're down to cover bills. I'd rather err on the side of leaving more money in cash.
Unfortunately, many investors don't take a long-term approach to building their portfolios and don't keep enough money in cash. Frankly, those are the people I'm worried about in the near term given the state of the stock market, not myself. If the market crashes, it won't be the first downturn I've experienced. Years of investing have taught me to take these things in stride.
