If you want to protect your money from future pandemics, you must take a few minutes to remember the last one. I know you don’t want to. I don’t want to either. On March 13, 2020, the stock market saw the biggest one-day percentage drop since 1987. The market had been bear for a few days.
So why didn’t everyone just start buying the stocks? They were on clearance, weren’t they?
I love cheap stocks, but investing is 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 loser’s game.
I lived in Italy when COVID hit (great timing on my part). So, I understand how seriously governments took it. We were on lockdown. It was literally illegal to leave your house.
But what about people who had to go to work and make money? Exactly.
So let’s take a brief trip down Horrible Memory Lane. This way, the next time there is any sort of financial downturn, pandemic, or whatever, you’ll have 5 rules to live by.
1. Don’t Buy What You Don’t Understand
If you know nothing about the stock market, don’t start buying random stocks because you “see potential.”
Never invest in something you don’t understand. Few people understand stocks. That’s why a long-term investing plan, such as low-cost index funds, will always win.
I’ll explain more about 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—a stock will go. And yes, it can always go all the way to zero.
We all saw the stock prices during the pandemic—especially those of airlines, cruise lines, and oil stocks—and we thought we wanted in. We wanted 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, and we’re in the middle of another crisis, you likely created it when the market was in a better spot.
Don’t change your plan because of the 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
- Diversity
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 over time at regular intervals.
Diversity in different sectors, securities, and types of investments will ensure your money is spread out to fight economic downturns.
Calm Down
I know this advice isn’t as appealing as “invest now and see huge returns!” when the market drops suddenly.
But it’s realistic.
I know many people who tried to buy all the stocks when the market took a downturn. Again, stop it.
If you’re unsure, and especially if you’re anxious, the best thing to do with your finances is nothing. Leave your investments alone.
Remember, the coronavirus pandemic didn’t last forever, but your money can (at least for your life) if you just calm down, leave it alone, and stay the course.