Tuesday, 14 July 2020

Stock Market Crash: How To Start Investing


How would you feel if you lost $100,000 in one week? 10% of your money would've just disappeared into thin air because that's how much money that you would have lost within a week if you had one million dollars invested in the stock at the end of February. As long as you continue to do smart things with your money by investing, then one day, you could have at least a million-dollar investment portfolio, so this is not an absurd thing to think about. You really need to ask yourself this question though, what would you do and how would you feel if this actually happened to you? Because if you invest long enough, then this is going to happen multiple times throughout your life. What happened at the end of February 2020, is called a correction. 


  • Correction
  • When the stock market drops by more than 10% but less than 20%.
  • It can last as long as a few days, months, or longer.

A correction in the stock market does not necessarily indicate that we are headed into a bear market. 


  • Bear Market 
  • When the stock market drops by more than 20%
  • Lasts for a longer period of time (2+ months)

We are considered in a bear market when the stock market drops more than 20% for a longer period of time, usually about two months or more. Since 1974, only four market corrections have turned into bear markets. 



While past performance does not necessarily indicate future results, it is still a good thing to know. 


  • Stock Market Correction Occur About Very 8 to 12 months
If you are 30 years old right now, then by the time that you reach 70, you are going to see 40 more of these. The last correction that we had was back in December of 2018 when the S&P 500 dropped by 12%, then, of course, recovered. 


Now before that, we almost hit correction territory between September of 2018 and October of 2018, when the S&P was down by a little bit over 9%. 



What I am basically trying to say is get used to it because it is a normal occurrence when you are investing in the stock market. 



Why You Need My Investing Rules

The reason you need to have rules for yourself before problems happen is to save yourself from yourself. It is the same reason that couples who are in their 9th month of pregnancy, have everything prepared and planned out for what they are going to do when the baby decides that it's ready to pop out, you want to be proactive as opposed to reactive. Good decisions are more difficult to make if you have not even thought through as many of the what-ifs as you possibly can. When the chaos starts to happen, you are going to forget about most things that you have learned and start making decisions based on fear, which is not good. Because fear-based decisions are what will make you lose money faster than you made it. I want to use this figure to help prepare you so you don't freak out in the future when this happens again.


let's get into some of my investment rules


  • Quick disclaimer, nothing in this article should be taken as investment advice, do your own research, talk to a professional.


Rule 1. "See You In 30 Years"

This might sound strange to most of you but it is something that I say to myself every single time that I invest money. The first reason is that I am a long term investor, the money that I am putting in today is for me in 30 years. It's so I can make sure that there's food on the table in the future, therefore, I am not losing money right now by putting it into the market, I am setting it aside for me, when I am 60, 70, and 80 years old. I am doing an old man a favor so he can choose whether or not he wants to work in the future. The second reason is more psychological than anything, it is a good way to consistently remind myself of what I am doing and why I'm doing it. It almost downplays the current events that are happening right now and allows me to feel more comfortable with investing in general. Think about it, in 30 years, when it's the year, 2050, I'm probably going to forget about some sickness that the world is dealing with right now. I will forget about how the market went through a correction in February of 2020 and will definitely forget about the presidential election happening later this year. But in 2050, I promise you, that I won't forget about the money that I invested this month, that will have the greatest impact on me than anything going on in the world at this point in time.


Rule 2. Consistently Invest Until 8%+ Drop

When the market drops by more than 8%, that's when I start to put a little bit more money into it than I normally would. Let me be very clear before I continue, I am not sitting around with a bunch of cash just waiting for it to go down, that's not a smart thing to do, I always have a little bit cash sitting around whether it's my emergency fund or right now, I have some extra cash because I am saving up for a rental property. When this has happened in the past, I have used money from my emergency fund. So if I have six months' worth of an emergency fund, then I might drop it down to five months so I can put that extra cash in the market during a correction. Then I would refund my emergency fund to get it back up to the six months that I personally prefer. Now at this time, you would not see me let myself go below that five months' worth of expenses. This has been a good rule for me since it makes me feel like I am still able to cash in during a correction, but at the same time, I'm not necessarily trying to time the market on a regular basis. The perfect example for this one would be my IRA, I use dollar-cost averaging for this account, so every month I contribute $500 so I can max it out every single year. 

If a correction happens then I would basically take that $500 that I would've invested in December and invest it today. If the market continued to decline or it happened again at some point throughout the year, then I would take the $500 that I would've invested in November and invest during the decline whenever that is throughout the year. I would continue to take money from my future contributions using the money from my emergency fund. 


Rule 3. Don't Buy It Unless You Are going To Hold Forever

Don't buy it unless you're going to hold forever, AKA, if you love it so much then why don't you just marry it? I am largely a low cost, total stock market fund investor, which by the way, is a mouthful. Now, this makes my decision a lot easier because I am not the one out there picking individual stocks for my portfolio, the index fund is taking care of getting rid of the lower performers and replacing them with higher performers. Even though I invest in index funds, it is still helpful for me because I go through the same questioning when deciding which one to purchase. If you are someone that wants to play the game of picking individual stocks, then this will force you to really really think before actually purchasing something. 


Rule 4. You Don't Lose Until You Sell

With investing, you only lose money when you sell, always remember that. Money on paper is different from money in your bank. When the market is down, you did not actually lose money yet, you only lose money when you panic sells because you don't understand the normal cycles that the stock market goes through. This does not mean that you should not sell something because the company is going under, and liquidating all of its assets, so you just need to salvage what you have left, but, it does mean that you need to question why you think that you need to sell your investment. 


Rule 5. Understand What You Are Investing In

You need to understand what you are investing in so you know how it increases and decreases in value. You do not have to know minute details of everything, but you should at least have a broad understanding of what you are investing in, so you are more educated. Don't just invest in something because I do, don't just invest in something because some other people do. Now yes, take note of the fact that they do invest in that particular thing, understand why they do, then go do your own research to understand if it possibly makes sense for you. For example, at this point you will never see me investing in Bitcoin, now did I consider it at one point? Absolutely, I heard about all of the hype just like you and all of these people supposedly making all of this money. I did not understand it at first, so I needed to take the time to do my own research, turns out that investing in Bitcoin is just speculation. There is no real way to value Bitcoin because it does not have cash flow, it produces absolutely nothing, which makes it nearly impossible to properly value. There's only a finite amount of Bitcoin out there, so when you invest in it, you are speculating that the price will go up. Now luckily, I took the time to understand this before blindly throwing my money into it, just like everybody else. 


Rule 6. Stay The Course And Ignore The Noise 

People are going to talk, news articles will be written, podcasts will be recorded, and videos will be filmed about what is happening in the investment world right now. If you have not noticed by now, 95% of it is just going to be noise, and the other 5% is actually going to be some valuable information that you should not necessarily react to, but it should still be something that you take note of for yourself. Things like what the Federal Reserve is doing and why they are doing it, how tax cuts are impacting these large corporations, and why these big corporations are buying back so much of their own stock. As long as you are doing the right thing with allocating your investments, between stocks, bonds, and other asset classes, as you move closer to retirement, then you should not be reacting based on the normal, daily, and weekly news cycles. 


Rule 7. Settle For Average

I am fine with my returns being the same as the stock market average. I am not trying to play the game of picking stocks that I hope will outpace the S&P 500, that's why I am a total stock market index fund investor. To be honest with you, this is a very very boring way to invest, it is extremely difficult to mess up, and by the way, it is also tough to write weekly or monthly articles, updating you on how I put money into the exact same thing this month, as I did three years ago. Less is more when it comes to how often you are messing with your portfolio and tweaking it. You have less control than you think over how your investments perform over the long run. I have read more than enough financial literature to accept this and stick with index funds. 






Conclusion

When a sell-off or a correction occurs, that's not the time that you should be asking if this is a good time to start investing. I see a ton of comments about how people want to start investing only because the stock market was going down at the end of February. They say, "Oh, should I start investing now "since the stock market is down?" And I am scratching my head, I am like, "What, why are asking that question right now?" If this got you thinking about investing, then I think that's great, there's a thing wrong with that, but, what the market is doing should not dictate whether or not you're investing.

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