Last week, a funny thing happened in the stock market. A couple of regional banks, Zions and Western Alliance to be specific, reported some bad loans on their books. And as a result, their stocks along with many bank stocks and the rest of the stock market dropped. But why? And what happened next such that almost no one is talking about it anymore? Is this a sign of a coming market crash or just a one-off event? And, more importantly, what does it mean for your investing strategy?

I'll do my best to answer all of these questions and more in this post!

A brief recap

On October 16, the overall stock market, here represented by the Dow and the S&P 500, both dropped. And only by less than 1%. That in itself is not an odd thing. The stock market will naturally vacillate up and down in the short term while it has, to date, maintained a steady upward trend over the long term. Which is why you invest for the long term.

In any event, it's the reason that the market dropped that was interesting. Because the markets had been up until late afternoon when there was a huge sell-off of bank-related stocks, more specifically the stocks of regional banks.

The reason for this was that, about 24-48 hours prior, two larger regional banks, Zions and Western Alliance, announced their loan books including some bad loans. These are loans that are unlikely to be paid. On things like mortgages and the like.

Again, this in itself is not astonishing news even if the amount of bad loans were more than expected. However, this came on the heals of the recent bankruptcy of two subprime auto lenders, Tricolor Holdings and First Brands.

Add in a quip like Jamie Dimon's proclamation that, in relation to the auto lender bankruptcy, that “when you see one cockroach, there are usually more..,” and some unease settles into the market.

The fear is a somewhat justified, if not rational, response by investors. Remember, what laid the foundation for the 2008 market crash? Subprime loans. If we see subprime lenders (A) emerging more in the market and then (B) going bankrupt or (C) disclosing bad loans, we start to imagine what can happen next. Hence the sell off and market drop.

But what really happened next?

One of the reasons I'm telling this story is because it so perfectly illustrates the capriciousness of the stock market.

The next day, investment bank Baird, declared that the drop in market value for these two individual regional banks was out of proportion to the size of bad loans it disclosed. And then another regional bank, Fifth Third Bancorp, reported higher than expected earnings.

And all of a sudden, the concern for an oncoming crash is assuaged and market optimism abounds. In all, the S&P 500 finished the week up 1.7%. Ands the Dow finished up 1.6%.

And since then, there has been very little talk about these happenings.

Is this an omen of a market crash or just a blip?

Let's play both sides of the coin.

As optimists, we can say that every bank has some bad loans and these recent bankruptcies and disclosures are part of a normal economy. They just struck a nerve because of the 2008 market crash. Without more evidence of a real problem with subprime lending, there is no reason to believe that the banking sector and overall economy are anything but healthy.

Now, as pessimists, we can say that subprime lending is a real problem, especially with inflation as it has been the past few years. Things get more expensive so people take out more money to pay for them. As more people want to take out more money, banks ease their lending criteria, especially as the fiat system pumps out more money (before inflation crests). Then, monetary tightening policies come into effect to ease inflation and all of a sudden, these high risk borrowers can't pay their loans. The economy buckles. And while we don't know the full extent of subprime lending in the banking industry just yet, even Jamie Dimon is imaging the cockroaches that will come scurrying out soon.

Both sides sound equally plausible. Because they probably are.

The truth is that we just don't know what this means. Only time will tell. And while that can seem relatively disconcerting, it's the reality of the stock market – where no one in history has been able to predict the market better than chance and luck would predict.

If I had to hang my hat, I think this is a blip of banks declaring their losses in proximity to a few bad companies that went bankrupt. But my crystal ball is no clearer than yours.

So the real question we need to ask is…

What does this mean for your investing plan?

Or even better, let's phrase this differently…what would happen to you if there was a market crash? Because this is what we are really asking. If an investor sells when they hear news like this, it means that their investing plan could not withstand a market crash.

That's why they are selling. In the instance that there is a crash, they are making a decision that it is better to have sold. And even if there is not a crash, the risk of one happening outweighs the benefits of staying in the market during whatever risky period there is (as deemed by the investor).

So, what would happen to you if there was a market crash?

I'll answer this for myself. Nothing would change. I would keep on investing according to my plan. 90% stocks, 10% bonds. Largely via a two fund approach with a target date fund and a small value fund as laid out here.

So, for me, this news means nothing. I note it as an interesting footnote and pack it away. Because even if the market crashes, I have a long horizon to need my nest egg and rock bottom stock pricing will allow me to invest cheaply and reap the benefit of future gains.

But what should you do?

Think long and hard about this question. If your answer is not the same as mine, then you need to make adjustments.

Maybe your asset allocation is too stock heavy and you are closer to needing your nest egg. In that case, an asset readjustment towards more bonds or cash is called for.

Maybe your asset allocation just doesn't line up with your risk tolerance and you would be tempted to sell in a market crash despite having a longer runway to retirement. Guess what? You still should adjust your asset allocation.

The final word

We could be heading to a subprime lending induced market crash. Or a crash for any other reason. On average a bear market hits every 6ish years. So it's not so much if it happens but when.

And no one can predict when. So you need a plan that allows you to invest in the market consistently and constantly.

Then, unless you are like me and are just plain interested in this stuff, you can ignore the headlines and focus on what you enjoy a daily basis as your investing plan takes care of the rest, assured you are on the path to financial freedom!

And if you are looking to create or optimize your personal investing plan, I have three resources that can help ranging from DIY to me helping you directly!

• For DIYer's, just copy and paste Our Complete, Updated Written Financial Plan into your own Word document and use it as template to create your own
• If you want some more context to guide your decisions, check out my book, Money Matters in Medicine
• And for those looking for the most condense, actionable and hands on advice, join me in my course, Graduating to Success!

What do you think? Is a market crash coming? Or is this a blip in the road? How do you handle financial news like this? What would you do if there was an impending bear market? Let me know in the comments below!