Investing during market fluctuations
* In case you didn’t know or are reading this blogpost from the future, currently the world has been put into a disarray by the Covid-19, AKA Corona Virus.
In the past two weeks from February 24 - March 6 the economy has taken a hit. The stock market fluctuates almost as if it were like Bitcoin!
Here is a snapshot of the S&P index over the past month:
In all fairness the stock market is unpredictable. The steep sudden drop very much was felt throughout the public as last week it felt like people were preparing for the apocalypse. However don’t be alarmed, we are finally due for a market correction.
Recent market behaviours:
The first week of the Coronavirus scare the Dow Jones and S&P dropped the most since probably 2008. Then the following week it seemed to recover quickly. In the mid-week the US fed and Canadian Big banks both announced big drops in interest rates which would encourage the ordinary public to borrow in order to stimulate the economy. That stirred up the stock market event more.
Very much so the Corona Virus could cause North America to fall into a recession.
No need to worry, it is only natural. We have been in a Bull market for far too long since ‘08.
In fact Bear markets (decline in the market) if they happen are usually shorter than Bull markets (market upswing). Average of 14 months of the former compared to the latter of 50 months.
What it means for investments:
Firstly I’ll say that you must not invest, buy, well based on emotions. So if you do tune in to the news and market watch and notice the big dip and fluctuations DO NOT PANIC SELL. I REPEAT. DO NOT PANIC SELL.
Emotion based decisions, especially driven by fear, anger or anxiety never result in an effective outcome.
For the long term investor you can view the stocks, funds, and ETF’s you intend to buy as on sale!
So when we view investments this way we want to continue buying when the market is dropping and best when we know the market is at its lowest. But wait, how do we know when the market is at its lowest? That is the best time to buy! True, but it is pretty darn hard for an average or even exceptional investor to time the market.
In fact the strategy to invest here is not to time the market, but do continue investing and buying the funds on a cadence and not changing your investing behaviours at all.
This strategy is called Dollar Cost Averaging. In short dollar cost averaging is the method of consistently contributing a fixed dollar amount towards some investment. In usual situations its towards stocks or our funds.
An analogy we can think of are homeowner’s fixed mortgage payments each month.
As a result of this strategy, let’s say during a bull run the price of the shares cost more, therefore the investor purchases fewer shares. However when prices of shares decrease, investors are able to purchase more shares. This is what we mean when we scream: “Stocks on sale! Cha-ching $_$”
Reddit post comparing DCA to timing the market
TL;DR: Dollar cost averaging investing is a better long term strategy than waiting the large market dip.
*Prefacing that you speculate the market and conversely the businesses you invest in to eventually recover.
Why it’s the best method of investing for the average Joe/Jane:
This turns our speculation and news watching to a minimum. When others in casual conversation ask what we invest in, or what is the next Apple, Amazon, what we should do in these troubling times, our answer will always be the same: “I don’t know and I don’t care”. Effectively we automate our investments into a boring chore and that is a good thing. Investing should be boring, straight and simple.
Also, it would do us a great benefit to watch the news less. This slight indifference to the world events keeps us sane and happy. Which ties nicely into this whole Coronavirus situation. If you really think about it, unless we are in China, each individuals day to day has not changed.
Fear and worry does spread to a collective and as a whole population you see consumer behaviour shift. However we can only control our thoughts and actions. This style of investing and information very much aligns with how I live my life.
Tips to prepare for times like these:
In general a good rule of thumb to protect yourself. Not just in a recession but it is good to breath a sigh of relief knowing you are relatively comfortable.
- Stay employed. So you have a continued stream of income to support you and your family
- Keep an emergency fund that will cover 3-6 months of expenses.
- Build a resistance and indifference to the volatility, Bear markets and fluctuations are normal
- Be wary of your spending, as in do not buy anything that you cannot afford PERIOD
Caveat:
In no way am I a financial advisor and telling you to invest in X funds. As always, be critical and take my approach and arguments for DCA with a grain of salt.
To support this if you are skeptical of the markets and do want to further protect yourself in a looming downturn and possible recession it is best to educate yourself investing. Possibly look into other vehicles to park your money.
A good way to hedge against the USD is to invest in precious metals such as Gold and Silver. Historically the metals have kept their value. For wealthier people they can invest in gold for most others, silver sits at around $17-18 per ounce so it can be an option for someone looking to be wealthy in the future.
Otherwise it is also not a bad time to looking into real estate as the Fed has dropped the interest rates.