Warning: This is when the share market will turn

Stocks are going pretty well. But don't be complacent, warns one expert. This is not normal!

| More on:
asx share price fall represented by investor with head in hands

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

S&P/ASX 200 Index (ASX: XJO) has repeatedly smashed records for all-time highs in the past month.

But one expert warned investors to stop thinking that this is normal.

"We always think the booms are normal. They aren't," said Marcus Today director Marcus Padley.

"What we are seeing now is a seemingly anomalous/illogical/inappropriate stock market boom. It is a moment, part of the cycle, but let's not pretend that making money this easily, that the ASX 200 going up 73% in a straight line, is normal."

Padley has been a stockbroker since 1982, and always has a rough boom-bust cycle in his mind.

"I know the industry has good periods (usually), boom periods (occasionally), and terrible periods — once every 3 years there's a standard 10-15% correction and once a decade a crash," he wrote on his blog.

"At the moment we think that this bull market is normal, but it's not — it's great."

So what will turn the boom into bust?

The unfortunate thing is that the share market boom can come crashing down from a very minor event as much as it can from a major catastrophe.

This is because booms end due to market sentiment. That is, emotions, not facts.

"When the herd turns, it turns, and it can do so without planning or logic. It could happen for the most subtle of reasons, or the most obvious, so let us not sit complacently by," Padley said.

"We all have to recognise that we are in the hands of an animal and it is not driven by logic or science. All we can do is watch for it and react to it."

How do we prepare for the market turn?

Padley's strategy is to stay invested and only react after the share market has actually hit the ceiling.

"Sell early and you and I could miss an infinite upside. Sell when the top has started, not before, and make decisions based on how much downside we can take," he said.

"'But what if it crashes?' I hear you ask. The market very rarely gaps down without warning. We just have to hope we are attuned to the signs and do something about the sell-off before it turns into mainstream panic."

For now, he advised investors to not fear the end of the boom too much.

"This could go on for years… Turn on our screens every day and continue to make decisions based on all the things that happen in fact, rather than making decisions on all the things we can imagine but cannot possibly know."

In the meantime, he's looking forward to the occasional correction, so that he can buy up discounted shares.

And once we're in the bust phase? Same as waiting for the top, keep your monitor on to see when the bottom arrives.

And be prepared to act.

"You'll need a watchlist of stocks you want to buy, and you might as well start that now. It is the same as the list of stocks you wish you had bought already but didn't."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
How to invest

The 3 rules new ASX share investors should always follow

These rules could help you generate wealth in the share market.

Read more »

Person holding Australian dollar notes, symbolising dividends.
How to invest

How to build a $1,500 monthly income stream with ASX dividend shares

It isn't as hard as you think to build a monthly income stream on the share market.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
How to invest

How to start your ASX share portfolio with just $1,000

Investing doesn't need to be hard. Here's an easy way to start.

Read more »

Happy young woman saving money in a piggy bank.
How to invest

How I'd invest $250,000 in Australian dividend stocks to never worry about money again

Here are a number of stocks that could be top options for income investors with money to put into the…

Read more »

Warren Buffett
How to invest

5 easy steps to invest like Warren Buffett with ASX shares

It isn't as hard as you might think to invest like the Oracle of Omaha.

Read more »