Everybody wants to make money in the stock market. And, to an equal or maybe even greater degree–almost everybody hates LOSING money in the stock market! This year, 2020, will go down as one where we got a big taste of both.
A Taste Of Honey, A Taste of Vinegar
As the year began, investors were treated to exhilarating high’s with record economic growth and employment numbers staying strong. Then came a little bug known as COVID 19.
All of us expected a correction at some point, and boy, did we get it. Worse yet, the “correction” (defined as a sustained drop of 10% or more from a peak) turned into a legitimate bear market (defined as a sustained drop of 20% or more from the peak).
The bug threw our economy into an iron lung, via a self-induced coma. The result has been a micro depression the likes of which we never expected. The market plunged, but found a bottom. A plan has been developed to bring us out of the coma, which means the COVID 19 bear market is different from the 2008 crash and the 2001 crash.
How The COVID 19 Crash Is Different From 2001 and 2008
Those crashes took down an overbought market in an accelerated way because stock markets and real estate markets got too far ahead of the economy. In the case of 2008, the U.S. banking system was a huge part of the problem. The banking system was overdrawn, and ran out of overdraft protection. Banks went broke, which is what happened in 1929.
The COVID 19 crisis was totally different. Today, banks are much stronger. Interest rates, much lower.
Yes, the Trump market was high, but the economy kept turning out solid productivity and employment numbers—meaning there was no identifiable “bubble.”
In fact, wages were increasing for the first time in decades, without causing inflation. While the politico’s were shouting that only Wall Street was benefiting from the boom, that was a false narrative.
The middle class was gaining ground due to the growing economy, even if workers didn’t own stocks. Those who DID own stocks gained even more. The politico’s often forget that those nasty, “evil” corporations they seem to hate, provide jobs for the middle class and the ability for them to retire because of the growth of their 401ks. If taxes and restrictions are raised on corporations, middle class 401ks will take it in the shorts. How does that help the middle class again? I missed that one.
So, how can we invest for the long term results we want in the stock market, without risking a devastating loss?
Yes, we all love making money and we all hate losing money. Here’s the problem. If you are going to be successful over the long run—which is the only run that really matters—you will see your share of winning and losing.
Your job as an investor—or the job of the person you hire to manage your money—is to optimize gains, while minimizing losses.
There are ways to do it, but it involves having key parts of your money invested in a diversified manner—not all of it in the S&P 500.
Face it, the market goes up and down for a living. Traders and their algorithms make money on both up AND down swings while you swing at a golf ball or push a swing for your grand-daughter. You simply are no match for robots that never sleep.
Do you really think it wise or productive to day-trade your 401k? Of course not. If you’re smart, you consider yourself a long term investor. Even so, when markets fall and the economy goes into a crisis, it takes real fortitude to resist the temptation to run for the exits. But resist you must—provided you own quality positions.
The older you get, the less time you have to recover from a major market loss
Selling short in a middle of dip can be a very expensive mistake for a long term investor. As an INVESTOR, you only LOSE when the market is down and you SELL. Investors who have weathered the storms of the past twenty or thirty years will confirm: as long as you are not withdrawing from your stock portfolio when it is down, it will tend to come back eventually, and sometimes to heights you never imagined.
The market is not a poker game, and its not a casino—unless you are buying junk investments.
If you buy a well located piece of real estate for example with rental properties on it, and the price falls you don’t lose unless you sell the property.
Eventually the rents go up and the value of the property rises. You own something unique that the world wants in a rare location. When the market swings back, your price rises as demand meets short supply.
In the stock market, the supply is also limited. Companies only issue ‘X’ number of shares. Each company has its own unique position in the market and the economy. It owns key real estate, patents, and distribution channels for its products.
The market fell backwards, but now it is opportunity time.
Companies that perform necessary services, or provide necessary products to a large hungry crowd keep rising over time, even when the price of their stock temporarily falls.
Do yourself a favor as an investor, especially if you are in or near retirement. Buy quality assets in short supply with potentially huge demand—the type of demand that can be sustained for decades.
When you think like a market timer, the market will treat you like one and eventually punish you. When you think like a long term investor who understands the business cycle, you know that setbacks are temporary.
When markets are down from previous high’s, excellent companies go on sale. In my view (and the view of many well known investors like Warren Buffett) this is an excellent time to re-tool and re-think your investments.
Make sure you have enough money allocated to fixed income and preservation to protect your downside. This is where the right mix of carefully selected annuities can be of help.
With the balance of your investment capital, invest wisely. Buy quality companies that pay steady dividends, involved in satisfying basic human needs and wants that will never change. The IQ Wealth Black Diamond Dividend Growth Portfolio is built on that concept.
For a bit more of an aggressive stance, invest in the technology from industry leaders that will take us into the future—like artificial intelligence, cloud computing, medical technology, biotech, software, microchip technology, 5G, robotics, and cyber security. These are the inevitable trends that are here to stay, priced very well right now. The IQ Wealth Blue Diamond Dividend plus Growth portfolio is built around that concept.
This year provided a shock. It is now providing an opportunity.
Insure your income, insure your outcomes, invest the rest with purpose®.
Steve Jurich, AIF® is a seasoned financial advisor who heads IQ Wealth Management in Scottsdale, Arizona. His daily radio program, MASTERING MONEY, can be heard Monday through Friday at 8am and 11am on Money Radio in Phoenix.