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I have received so many questions about how to invest in the current volatile market, that I want to send you my best ideas.
Investing in a minefield
Do you also have the feeling that investing at the moment is like walking through a minefield, you never know if your next investment, or the market is going to fall off a cliff.
How can we make money now?
When thinking about how we can make the most of the current volatility I thought of a quote by the outstanding value investor Shelby Davis:
“You make most of your money in a bear market; you just don't realize it at the time.”
This is easier said than done because, to profit later, you have to buy when markets are falling.
How can we do this?
Your plan to start buying
To start buying you have to prepare how and when you will start. This is important to stop you from becoming paralyzed!
This happened to me during the last two market crashes. I now have rules that at after a 20% fall I start investing using half positions. After a 30% fall I buy full positions for around 10% of my portfolio.
Find companies to buy
But to start investing you must have a list of great ideas. I hope you have already started your list - I have.
If not, it is not too late, here is an article on some time tested strategies to help you How to find great investments when the market crashes.
I have a list I add to all the time with the screens I run. Screens like the one we used to select the Corona Crash portfolio, a portfolio that went up over 50% in a year! You can see exactly how to find ideas like that here - Corona crash portfolio started - Cheap quality companies.
How to start buying
I know I will never know when the markets turn. No one knows this!
This means when we buy it may go down more, possibly a LOT more if the markets get irrational. That is why we recommend that you buy small positions – for example, 1% or even less of your portfolio.
And if you want to be more careful, buy over time. For example, 33% of the position now, 33% in a month and 33% in another month’s time.
Add a timing indicator
To stop you from buying a stock that just keeps on falling you can look at a short-term timing indicator like a 20- or 50-day moving average.
Buy when the stock price is above the moving average.
Keep your further losses low
Also decide if you are going to limit your losses. Research has shown a 15% or 20% trailing stop loss works best.
Think seriously about doing this as a stop loss helps you in two important ways:
- You will find it easier to invest if you know you can get out
- Keeping your losses low will prevent you from losing hope and selling all your investments at the bottom because you could not handle the emotional stress of large losses
If you are buying smaller positions over time, you can apply the trailing stop loss to each time you buy separately, or to the position overall but then perhaps use a smaller stop loss of 10% for example.
Here is a link to that article again.
The Mind Game
Rule #6: When things do not go according to plan
Planning on how you are going to invest is important.
You have to find a sound investment strategy that fits your nature so you can stick over the long term. This is one of the most important plans you can make.
The important part of your plan
BUT there is another important part of your plan!
It is the plan when your plan is not going according to plan. Also called Plan B.
You do this by making (or planning for) room for error. Also called margin of safety. This is something Warren Buffett talks about a lot.
The most underrated thing in finance
Margin of safety is one of the most underappreciated things you can do with your finances.
It comes in many forms. For example, spending less than you earn and planning on lower returns and more volatility than you expect.
Investing is not a hard science
Even though investment professionals want you to believe otherwise, you know investing is not a hard science.
It is investors worldwide making imperfect decisions with limited information about things that will have a massive impact on their financial health.
If you have enough room for error, holding a healthy part in cash, or stop losses for example. This lets you ride out market declines and lets you stick to you plan.
Make sure you can you survive a 30% fall
Can you survive a 30% portfolio fall?
On paper, perhaps if you think of paying your expenses and being cash-flow positive.
But what about mentally?
Do not underestimate what a 30% fall does to you mentally. Your confidence may disappear when the best buying opportunities appear.
You have to prepare for these things in advance to make sure you do not sell out at the bottom. You know if you do this you have no way of making up for your losses.
How to prepare
Investing for over 30 years have taught me how to prepare for large falls.
My best advice is to assume the future returns will be lower than the past. This means I save more than I would if I assumed the future will look like the past.
I also keep more cash. I keep three years of expenses in cash so a crash will never put me under pressure to sell.
My goal with this margin of safety is to make my forecasts unnecessary.
Aim to be reasonable
Because investing is not an exact science your aim must be to be reasonable when making financial decisions.
A reasonable plan gives you a higher chance of sticking with your plan over the long term.
As a reasonable investor you love your imperfect strategies. This gives you a huge advantage because you are more likely to stick with those strategies.
And there are few financial variables more linked to performance than commitment to a strategy during its bad years.
Your analyst wishing you profitable investing.
PS Have you already started building your buy list? If not, why not sign up today and start now.
PPS It is so easy to forget and put things off why don’t you sign up right now?