There is opportunity no matter what happens in the stock market. In a previous post, I talked about how taking too much risk in the stock market at the wrong time can shred your life savings. If you experienced downturns in the past, you probably learned this painful but valuable lesson several years ago. I learned this valuable lesson during the dot com bubble 20 years ago. Also, in a previous post, I shared the eye-opening fact that if the stock market drops 50%, then it has to gain 100% just to break even. I am now going to show how you can take advantage by buying into a falling market like this.
Consider the following set of loss/gain percentage pairs. If from peak to trough the stock market (or individual stocks for that matter):
- loses 20%, then, if you are fully invested at the time, you will gain 25% at the break even point (not including dividends)
- loses 25%, then, if you are fully invested at the time, you will gain 33% at the break even point (not including dividends)
- loses 33%, then, if you are fully invested at the time, you will gain 50% at the break even point (not including dividends). This is about where the stock market is right now.
- loses 50%, then, if you are fully invested at the time, you will gain 100% at the break even point (not including dividends)
- loses 75%, then, if you are fully invested at the time, you will gain 300% at the break even point (not including dividends)
Most of the time it takes just a few years for the stock market to recover to its previous high. So, it helps to not only have a loss mitigation strategy in your stock market investing toolbox but also a strategy for buying into stock market downturns.
No one knows where the bottom will be in this current downturn, but I just continue buying into the market as new lows are experienced. I am currently about 35% invested and plan to grow that over time. Now, although I learned a valuable lesson during the 2000-2002 dot com bubble which helped a lot during the 2007-2009 financial crisis, the additional lesson I learned from the financial crisis which I plan to apply to this downturn is resisting the urge to sell too early. This time I plan to buy into the stock market and hold it for a lengthy period of time. To be a successful investor you have to evolve and adjust your approaches over time. Because, no matter what happens, there are lessons to be learned and ways to improve performance.
Now, if you were getting fairly close to reaching your financial goals, prior to this current downtown, and found you’ve been taking too much risk, well, learn these valuable lessons now and make adjustments for the future and it will help you tremendously. If you are a long distance from reaching your financial goals or are a new or future investor then learn these lessons for the years to come and remember to reduce your risk as you begin approaching your financial goals and then buy into downturns so you can capitalize on them. Remember, there is opportunity no matter what happens in the stock market.
You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing (https://brighterdayslifecoaching.com/published-books-and-life-coaching-services/).
Make it your goal to learn these investment techniques so that you can progress towards achieving the financial freedom and independence you’ve always dreamed of.
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