The most straightforward thing to do that would have saved you in 2008, 2000 (and even 1929 to some extent), is to limit debt exposure and have enough cash sitting around so you don't have to sell your positions.
People who held (and invested more during the low points) did just fine. The people who got hurt the most were in a position where they had to sell (their 401k, their house etc) for a loss.
When a crash happens, it's a buyers market. In some ways it's a transfer of wealth to the top.
The problem is, timing the crash is impossible. Inflation chews into your cash portfolio, that could've been used to grow wealth.
Edit
There are of course more complex financial instruments. And they're interesting, but essentially amount to gambling. Holding short positions on sectors/companies is a zero sum game. As a retailer, you're betting against firms that have a lot of money and insider knowledge. Even if the thesis is correct, it has to be correct at the right moment.
Not financial advice, but: Honestly it’s pretty hard and I wouldn’t recommend it. Shorting stocks and getting into bonds / default swaps but the system is broadly rigged against small players doing well here. Ie in the Big Short see everything that was needed for two guys to bet with their own money.
It’s likely to be bumpy for all but stay the course with diversified strategy. The .com bust and 2008 are just blips and cheap buying opportunities for most folks with diversified portfolios and index funds. We’ll likely see similar messy markets for a while but the world will eventually recover and move on.
The ones that get truly wiped out are those with a lot of paper wealth now that implodes, but have little liquid wealth. These types go from “super rich” to can’t pay their bills almost overnight. Cash is king for times like those ahead so if you don’t have a lot of cash on hand, now is the time to secure that if you can.
Heck, it's pretty rigged against big guys too. The subprime bubble was not something that only Michael Burry knew about -- it was a front page story on the Economist several times years before the crash.
There were lots of big guys that bet against the bubble, but bet too early and weren't able to keep up with margin calls etc.
As well, I have a feeling that market dynamics have evolved a tad since 2008, from the influx of retail investors (redditors, if you will) who seem keen to "buy the dip" on general principle. So, who knows how poorly a short position on the wrong instrument or at the wrong time can even land.
> Not financial advice, but: Honestly it’s pretty hard and I wouldn’t recommend it. Shorting stocks and getting into bonds / default swaps but the system is broadly rigged against small players doing well here. Ie in the Big Short see everything that was needed for two guys to bet with their own money.
Do you base your knowledge on anything other than a very mediocre movie?
If an "investor" believes the market will sell off drastically, there are many, many ways they can express that bet in the open market. They can short index futures, buy put options, long volatility... so many options that depend only on the thesis being right. It does not sound as sexy as "look kid, the billionaires rigged the system!", but it's true.
The problem is the old saw about the market staying irrational.
You can't time the market reliably. Ultimately the base advice remains sound even if it's couched in a bit of conspiracy: diversify and allocate your assets based on your risk profile, as informed by your retirement timeline.
There's an entire profession doing that: traders. But for most people, yes, it is not worth it. No argument there. I just don't like conspiracy theories and that line of thought, it's cheap and stupid.
> There's an entire profession doing that: traders.
Well no, there's an entire profession trying to time the market. The data is not favourable as to their ability to actually do it at a rate greater than random chance.
But.
I also don't think it's reasonable to label as a conspiracy a claim that markets are rife with cheating, insider trading, etc. Just look at the current US Presidents profit margins.
Is that systematic, organized, conspiratorial, rich v poor market rigging? No. But it would be naive, I think, to believe that the rich aren't significantly advantaged in the market in ways that the average person isn't. There is, after all, a reason payment for order flow exists as a valuable thing.
Have a read of Jeremy Grantham’s book. Seeing bubbles is reasonably easy. Forecasting when they pop and when to get out is very hard.
For example GMO as at the end of April were forecasting through the bubble that returns for large US equities would be negative over the next seven years. But since then the market has gone up by over 30%.
It could pop any day, or could grow for two more years.
Advice is to diversify your investments and make sure you avoid systemic risks. Read books by value investors.
Seeing bubbles is reasonably easy. Forecasting when they pop and when to get out is very hard.
Amen, $SIBLING. Even an idiot like me could see it coming in 2007, triggered by a young coworker asking me about interest-only housing loans. But what do you do about it? I sure didn't know how to short the real estate market, and watch The Big Short to find out how hard it was for them to do it. That, and the ol' "market can stay absolutely fucking bonkers longer than..." chestnut. I would have lost my ass anyway.
But back to the topic at hand, indeed, the timing is very hard. Margin calls and watching the price of a borrowed stock go up and up, those mean that if you have to ask you shouldn't be doing it. Other sibling comments have already said that the answer is a diverse portfolio. As an investor for many decades, I've seen with my own eyes the wisdom of that. Sure, you'll take a loss like everyone else, but unlike everyone else your losses will be smaller. You'll miss out on the big gains that those with good timing will get. You'll also miss out on the absolutely huge losses of those that timed it wrong. Diversify, stay the course, it'll come back: that I've never seen fail after decades of investing. (But for $DEITY's sake, stay away from AI-specific companies if you can do it.)
I don't think there's a good way for individual investors to position themselves against economy-wide investment misallocation. As The Big Short also covered, any profitable short position is going to require making a risky bet about when the bubble will pop, and when things get chaotic there's no guarantee that instruments which "should" be correlated to the thesis will actually remain so. You can:
* identify a bad AI stock at $100 today
* produce an ironclad 100% guaranteed proof the company's valuation will drop below $50 by the end of 2028
* buy a bunch of long-dated puts with a break-even of $75
* see the AI investment bubble visibly falling apart in let's say March 2027
and you still lose if OpenAI acquihires the team at $80 in an attempt to prop things up.
> How would one position oneself as an individual investor if one believed this thesis?
If you knew when, it would be easy. But nobody knows the when. It might be tomorrow, next week or in 12 months or maybe two years or five. A drop is guaranteed, eventually, but nobody has any idea how much it will go up before that.
If you are truly convinced on this thesis, one could slowly keep increasing short bond allocations while moving away from tech, but no guarantees. Mainly depends how old you are. If very young, don't worry about it, stay invested. If near retirement, move to safer assets because you can't afford to loose everything now.
Be careful if you expect a dot com fallout - that was retail investor driven and took a long time to unwind as people sat through painful drops. Ai is much more of a private investment bubble. AI remains useful. What is likely to go away (and all at once) is investment and free rides/discounts.
So I expect more of a sobering process for AI companies rather than a blowup, simply because they all still will have cash in the bank and some have actual products with clients that make use of them.
Unlike the dotcom era, infrastructure is being built by mature highly profitable companies with broad product portfolios to exploit future trends and needs... Data-centres or even their power/water contracts seem like something with a lot of value even if we take a cynical view of LLMs profitability.
Am I overstating the case? My understanding is that a data center tends to be ‘purpose built’, so they may need a gutting for repurposing, but assuming a lot of ‘sobering up’ I’m envisioning several giant cloud providers with excess capacity and a scaling potential.
Be it Jevon’s paradox sparked by cheap compute, another huge tech fad, or a ML breakthrough that brings another kind of model to the forefront, we’re likely to want a lot of compute at some point. It doesn’t seem like bad long-term positioning for the tech giants or investors.
> How would one position oneself as an individual investor if one believed this thesis?
Buy and hold real estate, maybe?
I don't think you can really short this because you can't time it. But you can move assets to things that are 1) concrete 2) have utility and 3) that the US gov't won't allow to lose real value for political reasons.
