A possible 50% crash: What should I do?

Business insider recently released an article arguing the the case for the increasing likelihood of a crash, a big one in the range of 40%-55%. To be fair the article is quite balanced in that the author doesn't scream 'sell! sell!' and clearly states he is still invested in stocks but it did get me thinking.

I first became really interested in investing strategies soon after the financial crisis, which pretty much means I've only really experienced as a 'conscious investor' the wave of a bull market and never the white knuckle ride of seeing my investments cut in half by the panic of a possible world wide depression.

What has been fascinating though is during this time is the constant flow of end of the word predictions, end of the dollar, end of the euro, end of sovereign debt, end of USA, end of the european union, buy gold, buy silver, only to see the stock market just keep on going up, up, up!

It can be completely convincing and in fact compelling to read an article with deep analysis and flourishes of descriptive narration on how exactly the modern economy and its fiat currency will come to and end. The problem is all these predictions, despite their seemingly logical arguments have proven to be wrong!

The problem is with enough predictions going around combined with enough time someone somewhere will eventually look like a master predictor! As the staying goes 'even a broken clock is correct twice a day', although I prefer 'even a blind chicken finds a kernel of corn every once in a while'. Bear markets come and go, keep on predicting one long enough and you will eventually be proven correct.

Does it mean it will never happen, no of course not. It just means any prediction, bullish or bearish, is taken by my good self with a huge lorry load of salt! I read them, understand them, but then just file them in the 'could happen' category. I do not under any circumstance keep changes my investment strategies based on what I read. 

So back to this prediction that is currently taking hold especially with those with a bearish bent. Apparently valuations have only ever been this high twice before in history. That's right, twice, thats barely a correlation let alone a causation of severe bear markets.

Yes, there could be a 50% pull back from here, history shows they are rare but do happen. Should I though really care? When I care I mean, should I pull out all my money, change tactics, panic buy gold etc. Well I'm certainly not going to pull all my money out. Going to cash could easily mean I end up watching the market go to new highs whilst I sit on the sidelines waiting for Mr Market to deliver the big pull back that had been predicted.

(At this point it is important to say I have the benefit of not retiring in the next couple of years. For near retirees an upcoming bear market that could half your pension would be very worrying indeed).

Fact is bear market or not I will continue every month to add to my diversified portfolio of stocks and bonds in different countries across the globe. That will not change. On top of that with a 50% drop I will actually be scooping up twice as many shares for my future pension. 

Two years ago I was still adding to my European stocks when it looked like Greece would default and the whole union would fall apart. I was still adding to my emerging market stocks earlier this year when the supposed FED taper caused a pull back and the chatter was then about the end of the emerging market bubble.

This is the magic of passive index investing. Set up the monthly payments on automatic and let it run year after year, slowly accumulating stocks, ignoring the ups and downs of what might happen next.

Investors can even add a simple in/out trigger based on the 200-day moving average of each of the indices they are following in their portfolio. Simple. This way when the bears start shouting 'I told you so, look, look!' you can remain calm and simply sell and go to cash when prices fall though the moving average, then get back when prices move higher again above the moving average.

The markets are a complex ecosystem of many factors that do not always produce the same events and outcomes. Step away from the predictions, focus on putting together a sound investment plan and hold the mindset that no one really knows what will happen from here on.