We are currently in the midst of a crash . . . a bear market . . . a recession. Whatever you want to call it . . . it’s bad. BUT, that doesn’t mean that it has to be bad for you.
There’s no question that some investors will inevitably panic and lose significant amounts of money. On the other hand, there are also investors that will take this opportunity to succeed in growing their money to significant proportions. The question is: How do you position yourself to grow your money in the midst of a recession?
First: Understand that the stock market is a constant test. It may test your emotions. Know this. Accept this.
In the fifth grade, I failed my first test. It was on European explorers. I distinctly remember this because I was a straight “A” student and Mrs. Korbotlz’s fifth grade European explorers test marked the first time I ever failed a test. I had studied all week for the test. My mom quizzed me each night. I made flashcards.
On the day of the test, my teacher asked one single question: Who was the first European explorer to discover Florida? My mind went blank. I couldn’t remember the name. I made a random guess and was subsequently rewarded with a “F.” I cried.
But, guess what? That was over thirty years ago! In the long run, things turned out just fine.
That’s really how the stock market works. Sometimes it rises. You feel like you’re acing every exam and nothing can throw you off your game. Then, out of nowhere (and sometimes out of somewhere), the market crashes. Your “A” portfolio takes a deep dive into “F” territory and you want to freak the fudge out! You go on an emotional roller coaster.
Perhaps you’re on an emotional roller coaster right now. I wouldn’t be surprised. Have you seen the Dow and S&P lately?! They’ve been down more than 30% this month from all-time highs achieved just last month. In a matter of days, the stock market has crashed, crept back up, crashed, set off circuit breakers, and crashed some more. Reporters have referred to the market as “convulsing” or “spasm-ing.”
Not me. I like to refer to it as an “opportunity.” Maybe you don’t see it like I see it. If that’s the case, I’ve got some things for you to keep in mind.
#1: Don’t think about short term market volatility. Think long-term investing.
If you’re concerned about the stock market crash, remember: stock market investing should be long-term. History has shown that losses in the total stock market are more likely to occur over shorter periods of time. In fact, a recent MorningStar study concluded that 25 of the 93 years between 1926 and 2017 resulted in negative returns for the total stock market. But, in looking at the same data in overlapping groups of five-year periods, the study concluded that only twelve of any overlapping five-year period between 1926 and 2017 resulted in negative returns for the total stock market. And, get this - in looking at overlapping fifteen-year periods, the study found that there was not one single fifteen year period since 1926 where the total stock market was at a loss.
Note that this data included stock market performance during the Great Depression - the most disastrous economic period in United States history. Just prior to the Great Depression, the Dow Jones was at an all time high in September 1929. During the Depression, the Dow hit its bottom at an 89% loss. But, by 1944 (fifteen years past the market peak in September 1929), despite the Great Depression, the market had already outperformed its 1929 peak.
Of course, everything is clearer in hindsight. No one knows with one hundred percent certainty what the stock market will do in the future. What we do know, however, is that panic sales lead to losses. Long-term investing leads to the potential for incredible gains. Take note: Control your emotions. Do. Not. Panic. Sell.
#2: Stocks are on sale during a market crash. Take advantage of the markdown!
Many investors love to invest when the market’s doing well. It’s normal. We all love to see our portfolio grow. But what happens when the market crashes? Those same people who loved investing when the market was doing well, suddenly want to stop investing. Why?! Why?! Why?!
If you’re willing to invest when the stock market’s soaring, you should also want to invest when the market comes crashing down. During a market crash, you get an opportunity to buy stocks on sale! Instead of buying six shares of index fund XYZ for $300 per share, maybe you get to buy nine shares of index fund XYZ for $200 per share. This would be a good thing!
Warren Buffett agrees. In 2008, Berkshire Hathaway’s net worth was reduced by 11.5 trillion dollars because of the market crash. Buffett’s perspective:
“[T]he market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. . . . Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
— WARREN BUFFET
Take note: Invest like Warren Buffet - take advantage of the markdown.
#3: Remember: Paper losses are paper losses . . . until they’re not.
When the market crashes, it’s true that your portfolio may take a major hit. Obviously, it’s not going to be anywhere near Buffett’s multi-trillion dollar hits. Perhaps your portfolio goes from $700,000 to $400,000. That’s a $300,000 difference! If you sell your portfolio at $400,000, you most definitely lost $300,000.
BUT remember: If you don’t sell anything in your portfolio, it’s not accurate to say that you lost $300,000. That’s because (assuming you haven't changed your holdings), you still own the same amount of shares. Your ownership hasn’t changed. In other words, without a sale, your loss is just a paper loss. Sure, psychologically, it doesn’t feel good to see a loss - even if it’s only on paper. But, at least for me, I find comfort in knowing that I can protect against my actual loss by not selling. In other words, I may not be able to control the market, but I can control when I sell.
And, for me, I’m not selling my portfolio at a loss. I’m thinking long-term and I’m thinking “opportunity.” So join me, as we all take efforts to grow our portfolios, and solemnly vow to one another: Not. To. Freak. The Fudge. Out.
OUR STOCK PORTFOLIO UPDATE | Dealing with Stock Market Emotions (Ep. 7 - June 2019)