How to Use The Market Crash to Reset Your Financial Goals
A global pandemic infects many people in the body and infects the mass consciousness with the emotion of fear. Fear is a good thing if a train is bearing down on you because it causes you to react. I would hope that you will jump out of the way. Fear should also cause you to turn away from accidentally driving over a cliff. However, what happens when you are not in control and everyone falls over the cliff with you? Nobody has a parachute when the markets have a sudden major downside correction, which may force you to reset your financial goals.
All major downside corrections are always a surprise to most investors because it is difficult to time the market. Some investors may get lucky and have their timing just right to profit from a sudden downshift. However, they are just lucky. The vast majority of investors are not playing the stock market like a casino. You can avoid having to reset your financial goals constantly if you learn how to avoid risky speculation and ride out the down cycles.
Reset Your Financial Goals During the Market Crash
Two types of investors hold the vast majority of the shares. They are the super-wealthy 1% of high-net-worth individuals and institutional investors. These institutions also represent many individual investors who have invested have money, such as a 401K retirement plan, in things like mutual funds, which a financial institution manages.
There is also a small number, compared to the percentage of the institutions, of individual investors and some who “play the market.” For example, there are day traders who try to squeeze profits out of the daily volatility. These past few weeks and months provided many opportunities to get in and out of positions as the market swings wildly to the downside and then up again only to collapse the next day. This is the kind of thing that forces you to reset your financial goals if you are taking big losses now.
Day traders love it now as long as they do not hold open positions that go against their trades. For the rest of us, right now may be a good time to reset your financial goals or maybe make learning how to be a day trader part of how you reset your financial goals.
How to Reset Your Financial Goals
The goal is to weather this financial storm in a calm, thoughtful way because if you panic you are more likely to lose a lot according to a study of investors’ behavior. It may surprise you to learn that the Financial Times reports that not only panic selling may cause excessive losses, so might panic buying.
Review Your Old Goals
You cannot reset your financial goals if you never had any in the first place. I assume you had financial goals before the recent appearance of the bear market that is making you consider how to reset your financial goals.
It is a great time to review your previous financial goals. I hope that you wrote them down so that you can go over them again. If you have a written plan, with financial goals, congratulations. If you had the help of a financial planner who helped you create the plan, you get credit for that also.
Do Nothing And Stay Calm
Take the time to read your goals. If they are set to be achievable in the future, in about three to 10 years from now, your best bet under the current market conditions may be to do nothing at all. Let time heal this gaping wound in your net worth.
That is the Buy-and-Hold strategy. If that is your strategy then there is no need for any further panic. Just let your long-term investments ride out the troubles. It may take up to ten years or more for you to recover the value you had before the market downturn. Eventually, if you stay in decent positions, it may return to a high value. If the stock you bought were solid, you want to leave them alone and let this bad time run its course.
Set Your Goals. Grow Your Goals.
Visit the Goalry Mall.
Rethink Financially Vulnerable Stocks
The one exception to this is if your portfolio contains any companies, which suffered such severe damage to the point that they will go out of business. If you work with a financial advisor, ask him or her to stress test your current portfolio’s investments for this risk. Most companies, even those with significant losses in revenues, will not go out of business over this pandemic. For example, a company like Coca Cola will still exist three years from now, ten years from now, and probably 100 years from now.
Airlines will get hurt, some may collapse, but flying around the world in airplanes will not permanently disappear because of a pandemic. If you do not have a financial adviser, learn more about financial stress in various online resources. Find out which stocks you own are financially vulnerable. You may have to dump some of them and take the loss when you reset your financial goals.
Fracking companies in the United States that are burdened with debt and cannot extract oil for the low prices now, are sure candidates for bankruptcy. If you are holding some shares in companies that will not survive, you may just have to get rid of them and take the loss. The market already prices in a complete failure for most companies like this. The shares in them might be worth little now and never recover.
Just be sure you do not sell an Amazon-like company by accident. When the dot com bubble burst, Amazon survived it because it had a huge amount of money already borrowed. The company was not profitable for so many years. Now, it looks like Amazon will benefit greatly from all the current activity.
Hold on to shares in otherwise strong companies that are facing a temporary loss of business. If the economic changes are not enough to force them to close their doors permanently. Just because the stock market went crazy recently, does not mean that you have to go crazy too, when you reset your financial goals.
Here are some out-of-the-box ideas and investment strategies to help you weather the financial storm. These might be new ways you can thrive in downtimes:
1. Stop the Panic and Take a Pause (For Six to 10 Years)
Any financial goal planner worth his or her weight in junk bonds, will tell you that over the long-haul the stock market goes up. Even the devastation in 2008 did not last forever. It did, however, take a long time to recover the losses before the collapse. The stock market recovered within six years. Real estate values took about 10 years to come back again to pre-2008 prices.
After the dot-com bubble exploded in 2000, it took about eight years for the S&P 500 to recover. Then, just as things were looking decent for stocks once again, the real estate market collapsed in 2008.
After that major downturn, it took six years for the stock market to recover. Until the recent market collapse, the S&P 500 has been on an upward trajectory ever since 2010. The sudden market collapse, wiped out the gains of the past three years in a few weeks. Except for a few stocks that are acting contrarian to the recently disruptive trend, if you sell any stock that is in your portfolio, you are going to take, on average, a 25% loss.
2. Buy and Hold Strategy
Goal based financial planning benefits from a buy-and-hold strategy, if there is not any general market conditions, which would force you to sell your shares just because you need the money. The basic tenet of a buy-and-hold strategy is that you never want to sell your stock. Instead, you want to build up your ownership in the company over time by buying more shares.
3. Dollar Cost-Averaging
You can teach your kids family financial planning by showing them how to invest in stock using the dollar-cost average method to build up a portfolio over time. Kids who learn this, at an early age, are usually better at managing finances when they grow up.
This method uses a calculation of all the shares of a certain company that you own and for what price they were purchased. Then, it makes an average price per share for the entire amount.
4. Value Investing
People used to laugh at Warren Buffet’s lifestyle because he lived in a modest house, drove an old car, and wore the same suit for years, even after he became extremely wealthy. Buffet understands the power of living below your means. His biggest pleasure, besides building wealth, is his favorite drink of Cherry Coca Cola. He liked it so much he bought a huge amount of shares in the company when they were a bargain price before the company enjoyed huge global expansion.
Warren Buffet’s Stocks Strategy
Value investing goes along with a buy-and-hold strategy. Warren often says that his time horizon for how long he wants to own a stock is forever. He says he thinks of stock not as buying shares but as buying great companies.
When Warren sees the market go down, he is delighted. He has a chance to buy things that had too high a price for a long time. The stock market is one place where few people are clever enough to buy things when they are on sale. Warren buys great companies most of the time. He is not perfect and occasionally makes a mistake. Overall, his investment performance record for Berkshire Hathaway is spectacular.
He does a calculation that shows what price the stock must sell for, so he can make his desired rate of return. That is usually a low price. He just waits until the stock sells for that price and buys as much of it as he can, at the low price, before the price goes up.
5. Compounding
For an extended period, Warren Buffet was making about an 18% annual return on the investments (ROI). Some ROI came from increased stock prices and another part came in the form of dividends. Dividends gave him cash to invest in more stock of the same companies, which he liked, or in other things.
The rule of 72 is a fast way to calculate how fast something doubles through compounding. All you do is divide 72, by the annual ROI, to figure out how long it takes to double. For an 18% ROI, it takes only four years to double it (72 divided by 18 equals four).
This means if you start with $1 billion, in four years you have $2 billion and in 8 years, you have $4 billion. You need only use this strategy, at that spectacular ROI that Buffet achieved, for 28 years to create $128 billion from $1 billion.
6. Dangers of Leverage
Leverage is a technique of borrowing to increase investment returns. When things go well, you make enhanced returns because you use borrowed money to invest in more shares. This might be done by borrowing from the stockbroker where you hold your portfolio. The name given for this technique is “borrowing on the margin.”
The problem is, that when the market turns against your position, you can suddenly not have enough collateral value to sustain the loan you took on the shares. Then, the stockbroker forces liquidation of the shares to pay off the margin. You must immediately deposit more liquid funds to your account to prevent this from happening. When the market swings wildly, margin calls usually increase. Over-leverage may create an enormous loss and wipe you out. A recovery in the share price the next day will leave you stranded and you will be out of the market, not able to benefit from the rebound.
Leverage is very dangerous in volatile markets. This why any investor using leverage dreads getting a “margin call” from their stockbroker.
Overuse of leverage is a great way to go bankrupt. To avoid this, calculate what would happen if the share price was suddenly half and then use this amount as the absolute maximum you will borrow and only borrow on extremely strong companies.
7. Black Swan
Some people are saying that this pandemic is a Black Swan event, which is technically incorrect. A Black Swan event is an unpredictable event that causes extreme consequences. This type of event takes everyone by surprise and is very rare. The reason why this pandemic was not a Black Swan event is that we have known it was coming for a long time. We simply did not know when.
8. Bet It All on Black or Red
Even in the worst-case scenario, with up to 40% not getting the coronavirus at all and up to one-tenth of the people dying of the 60% that do get infected, we all have much better odds of surviving than this guy who bet it all.
Red or Black? - Betting Your Whole Life on One Roulette Spin
If you do the math, one-tenth of 60% equals 6%. That is still many millions of people with ungodly suffering that is not acceptable. However, it does mean 94% will survive. Your odds of surviving are much higher than this guy’s odds who bet on roulette. He only had about a 48% chance of winning (because of 0 and 00 it is not a 50/50 chance).
The Rest of the Story
Do you feel better than our odds of survival beat the casino roulette game? What if I told you the casino rigged the roulette wheel to let him win for the advertising value. It hit red-7 for goodness sakes! That is so many people's lucky number. Isn't the fix obvious to you now?
The casinos would never do that (yeah, right), and by the way, they are closed right now for the pandemic, so don't get any funny ideas.
Who knows if we make it through this one and have another one right afterward because there is another semi-black swan event that we all know is coming. This is the damage from global warming and climate change. Perhaps this pandemic is a wake-up call, to show us all how vulnerable we are and how small the world is. It only took about three months for a disease to start in one place and spread across the entire globe.
One thing I hope for is that all the world leaders follow the inspiring message given by the United Nations Secretary-General António Guterres. He says to stop all wars between humans immediately with a global ceasefire so that we can, as the human race, fight the global pandemic together.
Conclusion
I hope I gave you a laugh or two and some new ways to think about your investing strategy if you are planning to reset your financial goals. Sometimes to reset your financial goals means making the goals more manageable. Perhaps, you may discover meaningful things that are not as expensive as you planned.
Whatever you do to reset your financial goals, be aware that this pandemic may be followed by another one sooner or later. The last one was about one hundred years ago, yet we had some near misses with SARS, MERS, and Ebola.