Preparing for the Next Market Crash
Like a hell-broth boil and bubble
Twice a year — in April, after US taxes are complete, and six months later in November — I do a full accounting of our household’s financial assets, then run some projections for retirement dates and major financial outlays.
It’s all happening a little late this year, because by the time you count preparations and recovery/catch-up time, our eleven-day road-trip-with-dog in early April ate up more than a month of my life. (This is much of why Nine Lives went on hiatus in February. Other reasons include a major vegetable garden project, increased animal care, a death in the extended family, and prep work for stage two of our house repair/remodel, coming later this year.)
A few of you have known me long enough to remember back in the aughts when economics — micro, macro, and behavioral — was my primary area of study (aka Autistic fascination) and I kept a personal finance blog, Pocketmint. One thing I learned very early is that the best strategy for an ordinary investor — someone who’s saving long-term for something big like a house purchase or retirement — is to put the ‘stocks’ portion[1] of your investment portfolio in a total-market passive ETF and leave it there.
Not a mutual fund, because actively-managed funds both perform worse on average than passively-managed ETFs, and also charge more in fees — typically twenty to thirty times as much. Definitely not narrow sector funds or specific stocks — as an amateur, small-time investor you will consistently be on the losing side of information asymmetry; you might get randomly lucky, but it’s kind of like taking your future house, or your ability to ever retire, out for a wild night at a Vegas casino. The odds are never in your favor.
Betting on the total stock market is still betting, but it’s a much safer bet because it’s highly diversified — your eggs are spread out across thousands of different baskets. And while any given year might be a roller coaster ride, over a period of decades you can safely assume you’ll come out ahead.
I’ve been holding stocks almost exclusively via Vanguard’s VTI (Total Stock Market) ETF since I first started seriously saving for retirement around two decades ago. I hold Vanguard ETFs because Vanguard is shareholder-owned with no outside investors, meaning its fees are reliably minimal and — most critically — it’s not subject to conflicts of interest.[2]
None of that has changed. But this April I noticed something that set all my alarm bells ringing, something that caused me to start selling off VTI in our IRAs for the first time ever.
This is a problem with the entire US market, and every mutual fund or ETF based on it.
This is not a problem with VTI in particular, it’s a problem with the entire US market, and every mutual fund or ETF based on it. The stock market is wildly lopsided right now: the technology sector alone accounts for around one-third of US market capitalization — half as much as the other ten sectors combined. That’s a very recent change — at the end of 2018, tech accounted for less than one-eighth of the total market.
This is particularly alarming because I know that technology stocks are in a giant bubble. The pandemic did tech companies a lot of favors, but since 2022 their outsized growth has been largely based on the hype and grift around generative AI — all the false claims about the current and future capabilities of LLMs, and the lie that AGI (artificial general intelligence) is just around the corner.
(I’m not going to spend any time here trying to convince enthusiastic proponents of “AI” that tech stocks are in a giant hype bubble. Many other people have covered that thoroughly.)
At some point, that bubble will burst — the only question is when. It could be next week, or it could be in two years; if I had to guess, I’d say closer to the former than the latter. (It’s even possible that it’s already started — the true beginning of the end is never obvious except in hindsight.) But I fear this won’t be like the cryptocurrency bubble, or the NFT bubble, which primarily affected those people who bought cryptocurrency or NFTs.
No, with tech making up a third of the US stock market — with the companies most heavily invested in AI including some of the largest companies in the US (and the world) — I fear that that when those tech stocks do correct for the AI-related overvaluation, we’re in for a huge overall market crash. Think ‘2000 Dot-Com Bust’ or ‘2007 Financial Crisis’ territory.