So you may have noticed that the markets have dropped lately – even if you aren’t currently an investor you couldn’t not have seen it! The news has been FULL of it!
What I want to do in this post is hopefully make you feel more reassured that investing in a crisis is possible AND “do-able”; you just need to remember the rules.
“To be a successful investor, simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”
– Warren Buffett
But First, Some Fundamentals
I highly recommend the book “Unshakable*” by Tony Robbins. In this book he interviewed a number of successful, rich investors to see what kind of advice they had for all of us. The advice is sound and really useful to know.
- When the market falls by 10%, it is called a correction
- When it falls by 20%+ it is called a bear market
- These happen every 3-5 years on average
- 1 in 5 corrections turn into a bear market
- Bear markets don’t last….on average, they last 1 year
Note the use of “on average” – past movements of the market are no guarantee of similar patterns in the future, but they do provide some great cues. From this book, he has laid out a number of rules to follow so you can be successful too.
So now let’s get on with the rules for how to invest in a crisis.
Rule 1 – Don’t Sell!
So when the market falls, rule number 1 is DON’T SELL!!
If you sell in a crash, you make the losses “real”. When your money is still “in” the market, you still own parts of the businesses you have invested in. If you are investing in index trackers, then it is highly unlikely that your money will go down to absolute zero – if this happens, you’ll have a lot more to worry about in the world than stock market crashes!
The stock market works on people’s evaluations of companies – this is not always correct. Just because a market crashes, it doesn’t make the companies in the index suddenly useless or worthless. I’m pretty sure apple and microsoft are doing ok! Equally, when the market is doing really well, it doesn’t mean the businesses have suddenly become more amazing. Sometimes they are simply overpriced!
When the market recovers, your investments will recover too. And the best bit is, if you keep adding to it while the market is low, your new purchases will rise too!
Rule 2 – Don’t Try to “Stock Pick” or Guess
I have seen lots of people discussing about when the “right” time is to invest. They are trying to do it when the market is at it’s absolute lowest.
Let me be clear; no one knows this.
Unless you hold some sort of amazing crystal ball, you CANNOT know this. So trying to “time” the market is pointless. You’re better off just setting up a direct debit and getting on with it.
Equally, trying to decide which industries are going to do well and invest in those is another dangerous game. Unless you are well up to scratch with the workings of the company you want to throw money at, you run the risk of losing money if it collapses.
In a crisis situation, this is especially true. No individual company is safe!
Rule 3 – Diversify and Simplify
This brings me onto my next point. Index trackers allow you to invest in a whole range of companies in a low cost way. The idea behind this is if one companies drops in value, another can replace it. If the maket drops as a whole, all of the companies will fall in value together. You are spreading your money across a lot of companies – this is much better than picking individual ones.
It’s a technique known as DIVERSIFICATION.
You can also diversify in sectors (health, financials, technology etc), countries (taking advantage of different currencies) and asset classes – property, gold, bonds etc.
It’s literally doing the opposite of putting all your eggs into one basket – you’re far less likely to break them all if you spread them around!
Rule 4 – Consider Your Situation
How do you feel when you see these market drops? Are you cool as a cucumber or sweating in fear? Be honest with yourself. If you can’t hack the changes, you need to evaluate your risk tolerance. Vanguard have a handy questionnaire you could fill out that helps you see what kind of investments are right for you.
It’s also important to know when you plan to retire – the closer you get to retirement, the less risky some of your investments should be. Have 1-5 years worth of money in lower risk-type assets like bonds, and leave the longer term money in stocks and shares.
Rule 5 – Ignore What Is Going On
The newsreaders and journalists need to sell stories. Stock market drops make great headlines, and this is of course what they will use to grab your attention.
So IGNORE this. You know now that stock markets will do this from time to time, and they WILL recover. So keep calm and carry on!
Investing in a crisis is possible, and you really can do it! If you are not yet an investor, a crisis is a good time to start thinking about doing so. Even if you do just start with small amounts. You can use apps to help you get started with mere pennies!
Use this as an opportunity to learn something new AND pave the way to a successful financial future like a phoenix rising from the ashes. Let’s do it!!
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