Investing your money can feel scary, especially when one day you hear that the Dow Jones is down 1000 points, and then just a few days later, you hear that the markets are rallying again. It feels like an emotional rollercoaster. Except this roller coaster can cost you a whole lot of money if you don’t know what you’re doing. But not anymore. In this article, you will learn how you can help bulletproof your finances by going over five things.
Crazy Happens
What does that mean when crazy happens in the stock market? There are two terms that you understand that help define a downward movement in the stock market, and that is correction and bear market. A correction is when the stock market falls by 10%. A bear market, what many people like to call a crash,y is when you see the stock market fall by 20% or more. So, correction, 10%, bear market, 20% or more. But this is where things get interesting. How many bear markets do you think that we saw in the stock market between 1957 and 2022? And more specifically, when we say stock market, we are referring to the S&P 500, which is a group of the 500 largest companies in the stock market. Well, over these years we saw twelve bear markets, meaning twelve stock market crashes. And for you money nerds, what that equates to is essentially one stock market crash or bear market every five and a half years.
What does that mean? Crazy happens? This is not something out of the ordinary. We know that we see stocky market crashes. We know that we see stock market corrections because this happens more often than this. And so, history, while it doesn’t exactly repeat itself, does rhyme. And if you understand that crazy happens, you can then understand how you find the opportunity to make money when crazy happens. Because the ironic part of this crazy happening is that many people forget that crazy happens and they assume that markets will only go up.
But more specifically, how can you find opportunities in today’s economy to build wealth during a time where we have higher interest rates, we still have high inflation, we’re seeing a slowing economy, and we’re seeing a change in the job market?
Patience
Let’s go back in time a little bit. Take a look at the stock chart. Let’s assume that you bought the S&P 500 in the year 2000, right before the big dot bubble burst. Well, if you held on, you would have made your money back by 2007. And then, of course, we saw the big recession in 2008, which meant you would have seen another major market crash. But again, if you had held on, you would have been profitable again by 2012. We know crazy happens. We’ve established that. And that crazy creates opportunity.
But that opportunity is only there for the people that actually understand patience, because that means that you have to be able to hold on to your investments through the craziness. And during that patience, you have to stay calm. Because during that craziness, people panic, they freak out, they sell. When the stock market saw this minor correction over the last week, people panicked and freaked out, even though it wasn’t that big of a dip. And this is where you have to be able to cut through the noise and continue to stay calm as many people are losing their minds.
DIP? BUY?
You’ve heard the phrase buy the dip. Like Warren Buffett says, be fearful when others are greedy. Be greedy when others are fearful. What that means is if the markets are going down, you could use that as an opportunity to purchase. So if we go back to this S&P 500 chart, let’s assume that you buy in the 2000 peak, but then as markets go down, you continue buying. You buy here, here, here, and here on the way down. Then, as markets go up, you buy here, here, and here. You buy them on the way up. Then, as markets crash again, you buy here, here, and here. Then, as they go up, you continue buying. Well, what does that mean? Now, as the markets have really grown, you see that opportunity for your money to really compound and grow because you were able to use those downturns as an opportunity to purchase, maybe eveni buy more, maybe even buy more aggressively because that’s when stocks go on sale.
So what that means is that dips, corrections, and market crashes are really only bad for two people. They’re bad for the people that sell at the bottom because they panic and they freak out. And it’s also bad for the people that buy only at the top because if you don’t use those as an opportunity to buy even more when you’re paying top dollar, then you don’t take advantage of the discounts when they happen, and then you have to wait the longest period of time to see any return on your money.
Strategy
There’s two ways to go about investing your money in the stock market. You can invest into a fund, something like the S&P 500, where you can invest into an individual company like XYZ Corp. If you invest in the S&P 500, you’re investing in the 500 largest companies in the stock market. You’re essentially just investing in the stock market here. You’re investing in an individual company here. This company can go bankrupt, but it can also make a lot of money. So if you’re investing in this company, markets are going down, which can create a good buying opportunity.
Assuming that this company goes back up, they continue innovating, and they make more money. But if they go bankrupt, you then lose all of your money. So higher risk, higher return. This is the right way to go for some people, but for most people, this is not the right thing to do. Which is why 98% of people should not be buying individual companies. This is reserved for 2% of people who are interested in this, who want to spend the time researching this, want to spend the time learning about this, and who want to spend the time actually keeping up with this and have the psychology to manage this as well. Because the reality is markets go up and they go down. And sometimes you’ll see wild swings in the stock market.
The Amazon stock fell by 90% when the 2000 dot bubble burst. It takes a lot of patience and a lot of strong psychological belief to hold onto a stock when you see it go down by 90% and not know if it’s going to go back up. So it takes a lot of understanding of the fundamentals of investing. If you want to be investing in individual companies, especially when things go down, the alternative is you can invest in a fund like the S&P 500. Now the interesting thing about this is that XYZ Corp. might be one of the companies in the S and P 500. And if XYZ Corp. goes bankrupt, well, then it’ll get kicked out of this fund and be replaced by somebody else. So your risk is a little bit lower, but your upside is also a little bit lower as well.
But now when you look for opportunities, it’s a little bit easier. Less time-intensive, less work, less risk. And now when you see markets go down, it could be an opportunity for you just to invest your money into the stock market. This is one way to do that. There are funds that give you exposure to the S and P 500.
For example, if you invest in SPY, this is a ticker symbol of an ETF that gives you exposure to the S and P 500, not telling you what to invest in. Just an example. You could also invest in a ticker symbol like VTI. If you invest in the VTI fund, this will give you exposure to the total stock market. So now if you know what it is that you want to invest in, it’s a little bit easier because when you see downturns, they create opportunities. Now, of course, there’s a chance that markets will never go back up, and then you lose money. But if you believe in the future of the American economy, if you believe that the stock market’s going to continue to rally in five years or ten years or 20 years, well, then it creates a good buying opportunity because that means you can buy a piece of the economy while it’s on sale.
So you have to understand what it is that you’re investing in. And if you believe in the future of the economy, down days create opportunities. This is why recessions and market crashes create more millionaires than any other time because they create opportunities for you to come in. If you’re financially savvy, if you’re patient, and if you’re prepared, meaning you have cash, you can then come in and purchase some of these investments at a huge discounted price. But you have to know your strategy, and this is something you want to be thinking about before you see a downturn in the economy.
We know the markets go up and down, but you don’t have to wait for a down date to start your investing journey. What Warren Buffett says, one of the greatest investors of all time, is that time in the markets beats time in the markets. People who time the market end up missing the bottom, and then they end up selling too late. The reason is that when markets go down, you always think that it’s going to go down a little bit more and you’re waiting for that perfect time to come in and buy, and then you miss it and start to go up, and obviously it’s too expensive. And then six months go by. You wish you would have bought it when you thought it was too expensive, because now it’s way more expensive. Another six months go by, and then you wish you would have bought it six months ago. That’s the common trend. It’s the same thing when it comes to selling. Every time you think about selling, you think, Well, what if the stock goes up just another 5%? Then I’ll sell. And you’re waiting for that perfect opportunity. And that’s why so many people end up losing, because you’re trying to perfectly time the top, you’re perfectly trying to time the bottom, and you end up missing.
When you’re investing in funds like this, one of the simplest things that you can do is set up. An automatic investing strategy is called dollar cost averaging. Where now every week, every two weeks, or every month, you’re just passively investing your money into these funds. It’s automatic, it’s consistent, it’s passive. You don’t have to worry about it. And it happens on autopilot.
The only thing you change now is that when markets go down, you can invest a little bit more aggressively. That way, you can accumulate more shares of something that you believe in for the long term. And it’s got to be something that you believe in, because if you don’t believe in it, why are you investing in it in the first place? Just because a random person on the Internet said so? Not a very good reason. Do your own research, do your own due diligence, and only invest in things that you personally believe in and are willing to lose money on.
Know your Money
Many people have turned their stock broking into a separate checking account. You put some money in here, and you’re hoping that by next week you’ll be able to turn your $1,000 into $1,020. So you have a little bit extra money to pay for your expenses. And that is not what you want to do with your stock market portfolio or really any investing portfolio. Your investment portfolio is separate from your spending money, okay? You got to have savings money, you got to have investment money, and you got to have spending money. Separate these things, create separate accounts, separate bank accounts for each one of these things, and treat them very differently. Your investment money is something that you got to be able to let go of.
Do not invest money that you’re not willing to lose. If you need that money next week, if you need that money next month, don’t put it in the stock market. When you invest your money, whether it’s a stock market, whether it’s real estate, whether it’s startups, whether it’s gold, whether it’s cryptocurrency, if you’re going to be investing that money, you got to understand you’re parting ways with that money for years, if not decades, that’s the mindset that you got to have, that your money actually has time to grow.
Remember, first point, crazy happens. We know that crazy is a part of the market. If crazy is a part of the market, you got to be able to adjust that into your portfolio. So if crazy happens, you got to let crazy happen and adjust for that. Allow time for the crazy to happen. Because if you have time ahead of you, if you’re in your twenties, if you’re in your thirties, if you’re in your forties, even if you’re in your fifties, you have time ahead of you; let the markets do their thing. And if you’re not planning on touching the money for five years, or ten years, or 15 years, or 20 years, or 30 years, why are you freaking out over what’s happening over the course of a week? Especially if you continue to believe in the economy that you’re investing in.
If you don’t believe in the economy that you’re investing in, if you think the American economy is going to collapse, why are you investing in the stock market in the firstir place? So you’re investing in stocks because you believe in the American economy. And if you believe in the American economy and you’re investing for the long term, which is more than six months, why are you freaking out? When something happens over the course of a day, a week, a month, or even a year, let the markets do their thing. Use the crazy as an opportunity.
If you’re investing in good assets, do your financial education. Be prepared. Pay attention to financial trends. That way you can find the opportunity and use the craziness as an opportunity to build more wealth, not to build more fear and panic. Sure, you got a 600% increase in incomes over the last 50 years, but the prices of things that you need have gone up significantly faster than that. Back in 1971, the median household income was based off of one person’s income. In 2023, most households were two-income households. So you double the number of people working. But most people still aren’t able to keep up with the price growth of things.