Yesterday the stock market saw the biggest one-day percentage drop since 1987.
We’ve been in a bear market for a few days.
Does that mean it’s time to buy all of these stocks since they’re on clearance? Not really.
“But why?”, you say. “I want cheap stocks!”
I get it. That’s exactly what I want. I love cheap stocks, but it’s not as cut and dry as you think. It’s not as simple as buying stocks and earning profits. For several reasons.
This is called timing the market, and it’s a losers game.
I live in Italy at the moment (great timing on my part, I know), so I understand how seriously governments are taking COVID-19. We’re on lockdown. Since I can’t leave my house, I might as well write about how things are going in the US economy back home. Especially since that’s where most of my money is.
Let’s get to the point. Here are 5 things to know right now, during this economic downturn:
1. Don’t Buy What You Don’t Understand
If you don’t know anything about the stock market, don’t start buying random stocks because you “see potential.”
Never invest in something you don’t understand, and few people understand stocks. That’s why a long-term investing plan, in low-cost index funds for example, will always win in the end.
I’ll explain more on this in the next points.
2. You Never Know How Low a Stock Will Go
It’s true. We don’t know how low—or how high, for that matter—a stock will go. And yes, it can go all the way to zero.
We all see the stock prices—especially airlines, cruise lines, and oil stocks–and we want in. We want a piece of “the dip.”
But how do we know when the dip hits bottom? Well, we don’t. At least not until it starts to rise again, which can quite literally happen overnight.
The stock that looks like a bargain could easily lose 30% the day you buy it, and right now, that’s fairly likely.
3. Buy Companies, Not Stocks
I’ve said this 100 times: when you buy an individual stock, you aren’t investing in a stock price, you’re investing in a company.
Even the largest companies fail due to poor financials and bad management. That means financials and management are two important things to research before buying a stock.
The stock price itself means nothing. Nothing!
Don’t be so naive to think you’re getting a deal because of a meaningless number like a stock quote.
4. Don’t Change Your Long-Term Plan Based on the Short Term
If you have a long-term investing plan, you likely created it when the market was in a better spot.
Don’t change that plan because of recent news.
Long-term, slow growth is your best friend. Don’t get hypnotized by the media and financial news.
5. Stick With What You Can Control
What can you control? Here are 3 key things:
- A long-term investing strategy
- Dollar-cost averaging
If you’ve set up a long-term strategy that will likely earn you a decent return throughout your life, stay with it. It’s your best bet.
The only way we can “time the market” is through dollar-cost averaging, which is the strategy of investing a fixed amount of money in regular intervals, over time.
Diversity in different sectors, securities, and types of investments will ensure your money is spread out to fight economic downturns like this and news like the coronavirus outbreak.
I know this advice isn’t as appealing as “invest now and see huge returns!”
But it’s realistic.
I wanted to publish this as a warning, merely based on the amount of people I know who are trying to buy up all these stocks.
If you’re unsure, and especially if you’re anxious, the best thing to do with your finances is nothing. Leave your investments alone.
And please… calm down. This coronavirus pandemic isn’t going to last forever, but your money can (at least for your life), if you just calm down, leave it alone, and stay the course.