I recorded a huge loss during the pandemic from the stock market, and that might be my best expenditure for investment lessons.
The year was 2019. I just opened my brokerage account to start investing in the stock market. Little did I know that one year later, a pandemic wreaked havoc on our life.
My portfolio was down by more than 50%. As a beginner in the investing world, I was driven by psychology. I sold my entire stocks near the bottom of the market drop.
The rest is regret.
Now enough story, let’s get to the lessons I learned from my experience.
Be ready — for literally anything.
Who in this world thought that in such a sophisticated world, we would face another virus pandemic? Being ready for anything, anytime, for an investor is paramount.
How can investors get ready then? By having a liquid asset ready to deploy, i.e., cash.
It is of the utmost importance that investors have a spare fund to be spent on stocks right after a market crash. Even the most acknowledged investor in our era — Warren Buffet — had $128 Billion in his cash account in 2019 (click for the article). He really knows how to be greedy when others are fearful.
If you had bought the S&P500 index fund near the bottom of the crash (around $2,500), you would have generated a 40% return in less than a year! For an index fund investment, it is a remarkable result.
Of course, it is easier said than done. Looking from hindsight, we could see all the opportunities that we missed.
It is psychologically demanding and frightening to be buying when everyone else is selling. Nevertheless, there is a reason why 90% of investors (according to popular estimates) lose money in the stock market.
When 90% of investors are selling, you should be at the10% population.
You can start deploying money gradually when the market starts to drop. If the market bounces back, then quick profit! If the market goes down further, you can deploy more cash to buy more stocks at lower prices!
It is a win-win scenario when you have liquidity during a market crash.
Cutting your loss can be beneficial — if you voluntarily do it.
Most appraised investors preach about the long term holding period of stocks. I cannot agree more — Investing is a marathon, not a sprint. However, in some moments cutting your loss is beneficial for your investment.
When there is a better bargain
Let’s say the stock market crashes. Your stock (A) loses 10% of its value. There is stock B, issued by a good company relative to company A. Stock B loses 20% of its value.
Isn’t it better to move our fund from A to B? Maybe.
Stock market is not science. We are playing with probability.
Albeit uncertain, it is more likely that we can attain a better return by doing so. If both stocks return to their normal valuation, you will get 0% from stock A while you get 10% from stock B.
Stocks with sound business will win, eventually.
Have you ever felt afraid that your stocks will not perform well in difficult scenarios? I have.
With inferior stocks, it is so easy to get dragged by the crowd to buy and sell at a ridiculously high or low price point. When you have no confidence — or worse, no knowledge — in the companies, it is easy to get swayed when things are going tough.
Owning stocks of good companies with an impeccable track record will give you peace of mind during a crisis. It also gives you the confidence to not follow the herd and mindlessly selling your stocks — realizing your loss.
Sure when a market crashes, the stocks of good companies will inevitably plunge.
See the bright side! You get amazing stocks at an attractive price!
It is always a win-win scenario of owning good stocks.
Investment is more a game of mind than skills. The market will eventually reward those who don’t falter while swayed by crowd psychology.
Always be on the 10% side of the investors.