How to never lose money in a sell-off
The strategies and lessons in this article have prevented me from losing a dollar in this market sell-off
Are current headlines scaring you? With the strategies and lessons in this article, you’ll see you don’t need to panic.
Don't let the headlines scare you into losing money. Right now, the most popular strategy for investors is panic.
"Panic is not a strategy!" - Jim Cramer
Instead of panicking, let's take a more level-headed approach. This article simplifies the investing strategies used by great investors to navigate uncertain times.
Wise Words from Warren
If you don't know who Warren Buffet is, he is arguably the most accomplished investor in modern history. Many professionals in finance try to make investing seem complex. Buffet, however, speaks about it in very simple terms. One of his foundational investing principles is very easy to follow and very pertinent to today’s market.
"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful," Warren Buffet
The reason being is if you are following what everyone else is doing, you will get the results that everyone else is getting. To make money, you need to do the opposite of what everyone else is doing. When the market hits an all-time high or as Buffet says people are getting greedy, maybe consider selling some of your position. Also, the inverse is true. When everyone is selling or being driven by fear, consider increasing your position in some of your favorite companies. Not all at once, but gradually because you never know where the real bottom of the market is.
I am known as the stock guy in my office, and last year the market hit an all-time high, and the S&P 500 was trading at $3,000. I went into my investments and sold a sizable chunk of that position. My coworkers told me I was silly and that this market was going to keep going up. They were correct; it ended up going all the way to $3,300. However, as we have all seen, it can also go down quickly. Now the S&P is trading near $2,300. Because I sold when everyone else was buying, I am up 30% compared to my coworkers. I wish I could say I did that with all of my investments, I did not, but I am glad I did with that portion.
How to never lose a dollar in a market sell-off
The only way to lose money in the stock market is to sell your stocks for less than you bought them. Then why do so many people lose money in the stock market, you may ask. The reason is simple when they see the value of their portfolio go down on paper, and they panic and sell.
Fear driven selling is the most popular strategy for novice investors. What you need to do is to be able to ride out that wave. Do not make any of those paper losses real losses if you are in a position where you have to sell your investments to pay your bills. I would reconsider what money you are using to invest.
If you have significant life events that are going to demand sizable amounts of money, you are better off having more of that money in cash than in stocks. Think weddings, buying a house, going back to school, etc. The last thing you want is to find the home of your dreams on Friday and then find out that you can't afford the down payment on Tuesday because the market just went through a massive sell-off.
Never worry about the market again
If all this information has your mind spinning, I have a great strategy that will allow you to enjoy the benefits of the market without having to suffer through the headaches or stresses of it. The approach is called Dollar Cost Averaging. It is the simplest and most common way to invest in retirement accounts.
What you do is you find a stable mutual fund, let's say an S&P 500 fund, and you invest a fixed dollar amount into every two weeks. When the market is going up, you will get fewer shares of the fund; when the market is low (like now), you will get more shares. This strategy is the backbone of basically everyone's 401(K) plan. Dollar-Cost Averaging has been a great way to grow wealth slowly over time without having to time the market or make great stock picks.
No investor is perfect. Nobody gets it right all the time, so don't beat yourself up if you weren't prepared for this one. The big takeaways from this article:
Don't do what everyone else is doing
You can only lose money if you sell
Invest the same amount in fixed intervals
Markets are incredibly resilient. They have been through a lot, and they have always recovered. Past performance does not guarantee future success, but this is no World War II, and the market made it through that.
In life and in investing, we are not judged by our failures, but by the way we react to situations. Everyone needs to learn a couple of lessons from this sell-off and keep them with them for the rest of their investing careers.
This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
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