Why a dip in the stock market isn’t a bad thing
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The Hot Topic in the Markets Right Now
There have a been a few big events in the financial world over the last week that have been a hot topic of conversation. First, the US stock market had its worst week in over 2 years, after having gone through months of record-setting gains. Second, the cryptocurrency market lost about 50% from its peak value at the end of December 2017.
Yikes, that hurts….
Many experts have been saying a downturn in the stock market was expected, however, it still hurts and people still panic when it happens. Losing 2-3% of your investment value is not a good thing, but it could still be a lot worse, such as when the certain parts of the market lost 30-50% of their value during the Great Recession.
Then in the tumultuous world of cryptocurrency, the days of Bitcoin being worth $20,000 are gone for the time being, as the most popular cryptocurrency is not only worth about $8,000. This is a pretty hefty loss for people who just bought Bitcoin in the past few months.
Both of these events might seem like completely panic-inducing events for most investors, however, if you approach investing with the right mindset, these events are actually great opportunities. But to see events such as these as opportunities, it takes a different mindset with which you need to approach investing.
First the Mindset. Set a Strategy and Stick to it.
Investing is a skill, something that you can learn to do well through practice and instruction from great teachers. A few years ago, I didn’t know a thing about investing, and thought it was all about picking stocks and mutual funds while hoping that your choices went up in value. But actually, investing really has nothing to with luck, timing or insider information, but everything to do with learning a successful strategy and sticking to it no matter what.
So what is this successful investing strategy that is so simple? Really it is just a set of 3 rules that need to be followed to ensure that you don’t let yourself do anything stupid with your money. One of the most important aspects of investing is to ensure that you have the right mindset to prevent yourself from losing money by making bad decisions using your emotions instead of logic. If you can separate your emotions completely from your investing strategy, you will be set up for success.
The 3 Rules of Investing
So here are the 3 rules of investing according to me (but also a lot of other very smart people):
Don’t pay high fees – Traditional stock brokers, fund managers and big banks will try to gouge you with $10 commissions or 3%/year “management fees” to handle your investment portfolio. These people do this simply to line their own pockets, not because the world of investing is that complicated. You can avoid high fees by investing in simple index funds using Wealthfront.
Don’t buy/sell at the wrong time – This is probably the most difficult one to follow. Simply because it involves getting your emotions out of the game. Buying when the market is high and selling when the market is low (this applies to ALL investments, such as housing, stocks, etc) is the worst thing you can do for your returns. The best way to avoid this is to write out your strategy, such as “will invest $5000 in X and hold it for Y years” or “Bought stock A at $50 and will not sell until it reaches $70”, and then whenever anything unexpected happens in the market, you read your strategy to remind of what decision you need to make. The worst thing you can do is invest $5000, watch it drop to $4000, sell it, then watch as it goes up to $6000 in a few years. The market goes through natural cycles so it’s important to spend more time in the market and not try to time that market.
Follow an asset allocation strategy – Have you ever heard the phrase, “Don’t put all your eggs in one basket”? Well, this phrase definitely applies to investing. The best way to protect yourself from a risky situation is to spread out your money among many different investments, such as stock, bonds, real estate, a business, etc. This way if the stock market drops, you gains in bonds will help alleviate the blow. Or is the real estate market crashes, at least you still have your income-generating business to keep you afloat. One of the world’s most successful investors, Ray Dalio, is famous for his “All-Weather Strategy”, which is an asset allocation which is designed to generate a return in almost all market conditions. He only went down about 3% in 2008 when everyone else was down 30-50%! When it comes to high speculative investments, such as cryptocurrency, never put more than 5% of your assets into this category.
One of the best books I’ve read that outlines a similar stragegy is “Money, Master the Game” by Tony Robbins. This book completely changed my perspective and strategy on investing, and it’s a fairly easy (though long) read!
How to Turn a Market Downturn into an Opportunity
“Be fearful when others are greedy, and greedy when others are fearful.”
Warren Buffet is famous for saying this quote as a piece of his guiding philosophy on investing. Basically, he is saying that you should never “follow the herd” when it comes to how and when to invest your money. This is how you can capitalize on seriously great opportunities, and also avoid the fallout from financial catastrophes. A recession or stock market crash is never a great event for the economy as a whole, but it doesn’t have to be a terrible event for you personally.
Here’s an example. Let’s say avocados go on sale (millennials do love their avocado toast, am I right?) due to a great harvest. Now, you would probably go to the store and buy a few avocados because it’s such as great deal. Well, let’s say there was a really bad drought and the avocado harvest was poor so now they are selling for $10/each. Probably not a great time to buy avocados, right? Well, it should be the same with stocks, real estate and other investments. When investments are really cheap, you should buy them up because the price will probably go up at some point, but when investments are expensive, such as the last few months in the stock market or back in 2006 for real estate, you should probably say “eh, I’ll wait until the price drops’.
For some reason, it is completely the opposite of what just about every person does when dealing with their money. They buy when everyone gets all excited and prices are skyrocketing, and then they sell when the market plumments and everyone panics. Don’t be like the rest of society. Don’t be a sheep.
Turn lemons into massive market returns.
What are your thoughts and strategies on investing? How do you turn bad market conditions into opportunities? Leave a comment or send me an email! And also check out “Money, Master the Game” if you’re looking for a great resource on simple investing strategies.