When The Economy is Tanking, You Invest

  • You’ve heard it before: The stock market is going to crash — I’m pulling my money out. The Defensive Play”. 

We tend to hoard money in times of uncertainty. It is human nature. After all, what if you lose your job? 

The good news for workers in the United States—we have systems in place to help get people through hard times:

 

  • If you do lose your job, unemployment benefits are a safety net.
  • If you get sick, medical insurance will assist with payments. 

It’s a Clearance Sale

Don’t get me wrong—I’m not saying be reckless. BUT, think of it this way: 

The Stock Market is on SALE

Say you own a reputable stock at $15/share. It just dropped to $8/share.

Dang—but guess what? BUY MORE.

 

You’re going to wait for that stock to regain value anyway—why not make more money while you wait? 

 

If you are not yet investing in the stock market, now is a good time to start. I graduated from college in 2007 which was just about the worst time to enter the workforce.

 

But, it was the best time to start shelling money into investments. After 2 years of working, I bought Wells Fargo common stock (WFC) at $18/share. In early 2020, the value per share was $47/share. That’s 161% gain (if I were to sell). 

 

But I didn’t sell. After the Coronavirus outbreak, the stock ‘dropped’ and is trading at $25/share as I type. That would be a 39% gain—still good! 

This stock is a long-term investment for me, so I have no plans to sell soon. Will simply wait for the price to climb again.

 

This is the key difference between becoming wealthy and playing it too safe: when the going gets tough, BUY MORE

 

Rather than simply waiting for my current shares to reach $47/share again, how about buying more shares at $25 each and watching those gain value too?

'What-if' examples

I love math—so let’s put this into real money:

 

Scenario #1 if the market didn’t tank:

    • 2009: Buy 100 shares @ $18 each = $1,800 Cost Basis
    • 2020: Sell 100 shares @ $47 each = $4,700 
  • Money gained: $2,900 (161% return on investment)

Scenario #2 if the market tanked & I pulled money out:

    • 2009: Buy 100 shares @ $18 each = $1,800 Cost Basis
    • 2020: Sell 100 shares @ $30 each = $3,000 
  • Money gained: $1,200 (66% return on investment)

Scenario #3 if the market tanked & I bought more:

    • 2007: Buy 100 shares @ $18 each = $1,800 Cost Basis
    • 2020: Buy 50 shares @ $25 each = $1,250 Cost Basis 
    • The market will trend up. This is a reputable company so it’s fairly safe to say the value will climb.
    • Let time go by… Assume sell in 2030 for $70 / share…
  • Money gained: $7,450 (244% return on investment)

Time is on your side

In my opinion, the worst thing to do would be to sell all the shares now in hopes of minimizing the ‘loss’. No loss has been realized yet

 

  • If you are 2+ decades away from retirement age, time is on your side. 
  • Ride the wave back up—this time with even more shares.

Take a look at how WFC performed over a 6-month period during the COVID-19 outbreak:

WFC 6 Month 2020
Source: Yahoo! Finance

Looks pretty grim.

This is only a snapshot of a 6 month period! Hang tight.

Now take a look at how WFC has performed since the 1980’s:

Source: Yahoo! Finance

See that yellow line? The stock trend over the long-term is an upward motion. The 2 largest dips?

 

  • Financial crisis of 2008
  • COVID-19 outbreak in 2020

Notice how the stock recovered after 2008?

No risk, No reward

Sure one could argue that putting more money into stock during a recession is too risky. And given some poorly rated stocks I would agree. Buy stock in “the good ones” and your risk will go down. You may think—I don’t have spare cash to invest. Probably feels that way, but ask yourself this: 

  • Can you skip a few ‘nights out’ or rounds of golf to invest in your future self?

What do people approaching retirement age wish they could tell their 20 year old self? Save sooner. Invest sooner. 

We never hear people wishing they waited 10 more years to save/invest. 

When the going gets tough, find a way to start investing or double-down on your portfolio. It’s a clearance sale—the best sale you may ever find.

 

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