Spoiler Alert! A Market Crash Is Coming

It has been a good couple years for investors.

Since the dark days of March 2009, the FTSE All-Share has climbed more than 100% and has posted gains during four of the past five calendar years.

From the end of the market’s slide on 3 March 2009, we’ve seen the index provide investors with an average annual return of almost 16% (before dividends). That’s not too shabby, and well above the 9% average market return seen in the UK since 1900.

Of course, if we’re talking averages I must point out that the market has gone up two out of every three years – on average.

Which means it’s gone down one out of every three years.

For the record, our last down market occurred during 2011.

My crystal ball’s as cloudy as yours

Now, I’m not a soothsayer and I’m definitely not a doom-monger. I’m still investing my money in the market and I personally expect to see another year of positive returns in 2014.

But I could be wrong.

Eventually, we will see the stock market put up negative numbers over a 12-month period. That’s just a fact.

But it isn’t a fact to be feared.

You see, I love a good market scare. Not because I’m a masochist – I’m investing in this market right along with you – but because down markets produce opportunities to pick up high-quality companies at attractive prices.

The time to be brave is coming

The oft-quoted Warren Buffett tells us to be greedy when others are fearful and fearful when others are greedy.

But it can be hard to buy when the market is falling (and, again, it will fall) and it is scary when your portfolio is flashing red.

I read an article by a hedge-fund manager the other day, in which he pointed out that a 20% drop in the market requires a 25% recovery to break even.

Obviously he was trying to sell his (rather expensive) product that he said could reduce your downside for the minor cost of limiting your upside.

But he completely missed the point of investing – at least investing like we do at The Motley Fool.

Investing is not a one and done proposition. If it was it would be called invested.

No, investing is something you do continuously throughout your life – and throughout market ups and downs.

So, yes, a market fall hurts your portfolio, but if you continue to invest even as the market falls, you’re getting better prices for the companies you want – a practice known as pound-cost averaging, which can have wonderful long-term results.

Pound-cost averaging works because market scares pass. Even the massive 48% sell-off between October 2007 and March 2009 has been reversed.

In the past two years – during which the FTSE All-Share has rallied 23% before dividends – there were two occasions when the market fell more than 11% and there were several other smaller, but material dips.

In the market it is rarely a smooth ride up

People that were scared out of the market in 2008 very likely missed the massive recovery in 2009 (the market soared 55% from its low on 3 March to the end of that year) and may not have participated in the further recovery since then to recoup their losses.

In contrast, those that held firm and continued to put their money to work are likely to have seen their portfolios grow even faster than the market.

So as we enter 2014 riding a strong market, people may wonder “Should I take profits?” or “Should I wait for the market to fall before I get in?”

To them I offer a whole-hearted “No!”

Nobody knows when the next market fall will occur and nobody knows when the next recovery will be.

So I say the best plan is to put your money into companies you think will stand the test of time and let them create value for you.

That way you have a better chance of preserving your long-term wealth in any bear market…

…and a better chance of rebuilding your long-term wealth in the subsequent recovery!

Anyway, that’s what I am doing and it’s why I’ll still be investing throughout 2014 regardless of when the next crash comes.

Here’s to fearless investing in 2014 and beyond.

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