How to Invest During a Crisis?
In my previous post, I briefly touched on how to prepare for a market crisis. However, readers were asking me to elaborate more, so I am going through them in this post.
Don’t Even Try to Predict the Market
Back in Jan 2019, many economists gave their predictions of the future yield for US Treasury (a.k.a Bonds) for 2019. As you can see from the chart, so far none of the predictions were right.
These are professional academics and Wall Street economists who “predict” the market for a living, and yet all of them were wrong. And this is not a once off event where predictions fell short, in fact just google it and you will be flooded with examples showing how market professionals are consistently bad with predictions
Hence, I will be the first to admit that I have NO ability in predicting the market. While the market is a dynamic and “living” creature that has some consistent habits, it is mostly unpredictable.
While I cannot predict, I can prepare for what is to come. Accepting this notion of “Predicting vs Preparing” is very important to investors as it will determine what are your plans to prepare for a market crisis.
While, I cannot accurately predict WHEN the market crisis will come, I can prepare for the inevitable market crisis will come EVENTUALLY.
It is not a matter of IF but WHEN.
-Anon
Why?
Because the market moves in cycles. Unless something fundamental changes about human behaviour, it is very likely that the market will continue to move in cycles.
If you want to read more about market cycles, I would recommend two persons to follow. They are Ray Dalio and Howard Marks, two of the most prominent hedge fund managers in the world. They did a great job in explaining the complex market cycle in layman terms to benefit common folks like me.
But if you want a quick summary, both Dalio and Marks agree that we are at the late stage of the market cycle, this means the future market is likely to move lower.
This is perhaps most clearly seen in the S&P500 chart. Each grey portion represents a period of recession, and it has been almost 10 years since we had one. From my memory, the longest period we had without a recession was 12 years. So based on historical trends, we are fast approaching that limit.
However, we are not in the business of predicting the next market recession, our job as investors is to prepare for it.
How to Prepare for a Crisis?
There are a few things that I do.
- Invest in Great Companies
- Keep Some Cash Aside
- Prepare my Crisis Watchlist
Invest in Great Companies
While awaiting for the market crisis, I would still be invested in the great companies because I don’t know when the crisis will be here so I want to continue to enjoy the investment returns from these companies. Simple.
Keep Some Cash Aside
However, I will keep some cash aside to take advantage of the market crisis when it happens.
Prepare an umbrella, you never know when it would rain
– Mummy
Prepare My Crisis Watchlist
Lastly I have prepared a watchlist of companies that I would like to invest in given a good price. It is prepared BEFORE the crisis, and when the crisis happens, I would just invest based on it WITHOUT hesitation.
My reason for creating a watchlist is simple. I would not trust myself to behave rationally during a crisis.
It is well-known that investors’ behaviours are often affected by recession and that led to irrational investment decisions. Hence, I do not wish to make investment decisions during the crisis as my mental state would likely to be suboptimal.
I want to be able to invest in these companies at a great price when the market offers it. Hesitation during a crisis will cost me future profits.
During a crisis, all I trust myself to do is “follow a list of predetermined investment decisions and just carry them out without questions”. I hope I can still follow my own orders then.
That’s it! This is my great plan to prepare for a market crisis. No prediction, just good old preparation.
Enough of doom and gloom, I will write about something more exciting in the next post. Promise!
See you soon!
Investing Always,
Pete
Please refer to the disclaimer here
