How to Take Advantage of Market Downturns
With the start of December, it looks financial markets are reacting negatively to the Federal Reserve starting to talk about tapering bond purchases to help the economy recovery. But the new Omicron variant to Covid-19 that has investors concerned as well.
As the Fed starts to end its pandemic-era stimulus program it means a decreasing amount of securities it buys every month. The stock market would rather have an accommodative Fed, so any tightening is news the stock market doesn't like.
But should you be concerned? In the short-term, the answer is yes. It is now time to be more careful with your investing. But for long-term investors a market downturn is a buying opportunity.
What is always amazing about stock markets is after a crash they always recover and move higher.
There have been 36 years in which the S&P 500 recorded an 11-month rise of 10% or more since WWII. In the December of these years, the S&P 500 climbed in price 75% of the time, recording an average advance of 1.8%. That gain exceeded the average for all Decembers since 1945.
It might help you as a potential investor to understand you don’t have to fear market crashes. In fact you can benefit from them, without trying to time the market.
But one thing is certain, there will be another stock market crash at some point. That's just the nature of financial markets.
Here is how you can profit from market crashes in 3 steps.
Keep in mind, for every seller there is a buyer in the stock market (assuming a trade gets processed).
Step #1: Don't Panic Sell
The biggest mistake you can make as an investor is selling in a market crash. This means you would be getting out of stocks at the worst possible time. You want to be a patient investor. Selling in a down turn means in effect you have locked in your losses.
Step #2 Think In Terms of Income Rather Than Value
Fortunately, there is a different way to invest that makes recessions an opportunity to be seized. Rather than looking at your portfolio value, look at your portfolio income.
If you have a portfolio of stocks paying on average a four percent dividend yield and your investment account is around a million, then you have an annual income of $40,000 from dividends alone.
To be a successful long-term investor, you need to put your focus on what your investment account does rather than on its value. It also means investing in dividend growth stocks. What matters are rising income payments from your portfolio, not the dollar amount of the portfolio.
Step #3: Buy When Others Are Selling
You can really benefit from any market correction by buying while shares are on sale. You can use market corrections by thinking of them as discount sales on great businesses.
You can take advantage of 'sale' prices during market crashes by:
Consistently investing on a monthly basis. This allows you buy more shares when prices are dropping and buying fewer shares when prices are going up. This popular approach is called Dollar Cost Averaging and it works.
Or simply continuing to investing your excess dividend income into more shares.
When people are panic selling, the real professional long-term investors are quietly on snapping up shares in great businesses at reduced prices. Its like having a sale on bread at the supermarket. You simply pay less and might even pick up an extra loaf.
Where do you find these great companies? If you have read “The Five Paths to Wealth” then you already know about dividend growth stocks, the select list of stocks that consistently turn a profit and return those profits to shareholders in the form of increasing dividend payments. Year after year. These stocks are know as Dividend Champions, Dividend Aristocrats and Dividend Kings.
You don’t have to buy all the companies on one of these lists, it is simply easier to buy into the ETF fund that tracks to the index for dividend aristocrats, in this case the S&P 500 Dividend Aristocrats ETF/ProShares Trust (BATS:NOBL).
If you’re looking for a way to invest in some of the best dividend-paying companies in the world, Stash’s “Delicious Dividends” ETF, more commonly known as the Schwab Strategic Trust (SCHD), might be worth a look.
The ETF is nicknamed “Delicious Dividends” because it includes shares of around 100 of the best dividend-paying companies with long-term track records of financial stability and consistently generous dividends.
There are many ETFs out that pay dividends. Here are some examples of other dividend paying ETFs.
Click on the links to reach the company homepages:
Schwab Strategic Trust (NYSE: SCHD)
The rise of low-cost exchange-traded funds, tax-efficient Roth IRAs and upstart discount brokerages like Robinhood, Betterment and Acorns (and now powerhouses like Schwab and Fidelity) have made it easier for anyone to stash away at least a little of their money into stocks.
Just invest with a long-term prospective. Jumping in and out of stocks is
likely to produce poorer results for you.
Does your employer provide a 401k retirement plan? Make sure you to
use that to invest in stocks for your retirement, you are likely to find at
least one of these ETFs or funds that have similar investment objectives.
Invest in a 401k, especially if the employer provides a generous match.
Matching contributions is essentially free money.
You can learn a lot more about investing when you pick up a
copy of Five Paths To Wealth by Floyd Saunders, Founder of
Really Simple Investing.
It's available now on Amazon in a print or eBook version. Other
books by Floyd Saunders include: Figuring Out Wall Street and