What a Global Pandemic Has Taught Me About Investing
You can’t time the market; patience is key, create goals
Disclaimer: This is not financial advice. I am not a financial advisor, just a practical guy, writing about a practical world.
I think of myself as a pretty savvy investor. I have been investing for about 12 years now. I own several different types of investments. Stay tuned for an upcoming post about alternative investments. I entered into the workplace right after the financial collapse of 2008. This was the start of a bull market (solid growth) and at that time, every investor felt like a king. For reference, when the market is doing well, investors think they are geniuses. When the market is down, it is everyone else’s fault. For the most part, it really took until 2018 until we saw the first real correction and bear market (20%+ decline) in a long time. Little did I know that 2018 would only be a small taste of things to come.
Like most people, when I entered the workforce, I started contributing to my employer provided 401K. After all, it was free money. Watching my 401K grow quickly was both a blessing and a curse. I rarely ever paid attention to the returns, or the diversification, just that the amount was growing fast. This made me believe I was a smarter investor than I really was, but in reality, it is because I was being matched at 100% every paycheck.
I then decided to start dabbling into individual stocks. Being relatively new to the market, this was a bad mistake for me. I did very basic research and essentially said, Company X is up 100% in the last year. I am going to invest a lot of money in it. Well, we all know how that story goes. Company X did not continue to grow at that pace, and in some cases, even came crashing down. This was the first time in my life I lost large chunks of cash.
At this point, I started learning more about index and mutual funds as well as bonds and diversification. Stay tuned for an upcoming post about a different type of fund. To summarize, I learned that by putting money into diversified funds, I could amass a large wealth over time and do it in a safer, more predictable way. I would have to be patient, and I would do what is known as dollar-cost averaging (fixed payments over a recurring period of time) to truly grow my wealth. I also re-invested all of my dividends to further my cause. Well, I did this for several years, and I did grow my wealth. Remember, though, I was doing this during a bull market, so I already felt like the smartest person in the room.
Enter one of the worst pandemics in modern history, COVID-19. I am not going to spend time on the pandemic itself, but let me say it is absolutely awful. I feel for everyone that has lost someone, or something, and I hope it ends quickly. There is great news on the vaccine front; we just need to honker down right now. If there is one thing that investors hate, it is uncertainty. COVID-19 created nothing but uncertainty. At first, no one knew how dangerous the virus was, and we witnessed it spread like the wildfires that ravaged the Pacific Northwest. This was the perfect equation for a true market selloff, one of the worst in history. Businesses were forced to close, airlines stopped flying, people stopped leaving their house, and the stock market crashed. There were some stocks that lost their entire value. The major indices were down more than 40% percent.
Like every other investor, I was very scared. Having never experienced anything like this, I made some regrettable decisions. I started selling some of my funds. I moved all of my retirement funds into money market, and bond funds, and I stopped contributing any more money to any of my investments, including my kid's college funds. All of these decisions potentially cost me an additional 15–20% of my net worth. I had a theory that the market would continue to go down until there was a vaccine or treatment announced. For a while, it looked like I was right. I even went as far as to tell other smarter investors that they should re-balance all of their funds, or if they were close to retirement, sell everything. My plan was to ride the market all the way down until a vaccine or treatment came out, then buy back in. I believe at one point, the Dow Jones retraced five years' worth of gains. I also talked to some really smart, senior finance executives who told me that even in a pandemic, there are both technicals and fundamentals that will prevail, and there will be lines of support that will take hold. I did not believe this, but again, I just missed the crash of 2008. They also reminded me that I am only in my 30s, nowhere near retirement, and this was the buying opportunity of a lifetime. If you need more proof, put your financial contributions into an investment calculator. You will see how amazing the power of compounding really is.
Then something amazing happened. Scientists started to better understand the virus, and the world figured out how to work and live during a pandemic. These realizations were a catalyst for what came next in the market. People started buying stocks in droves. I don’t just mean investors; I mean your average mom and pop shops, high schoolers, people who had never owned a stock in their life. Robinhood, the investing platform, saw a massive uptake in millennial investors. All of a sudden, there were companies that were up 300%+ within a few months. It was completely euphoric. Unfortunately, I was late to the rebound. I missed out on the first 15–20% of the rally by the time I bought back into the market and resumed my recurring investments. I also bought back into stocks that had rallied so much that they actually started declining more after I bought them, which for some, scared me into selling.
I then had my aha moment. The beautiful moment when it finally clicked. I realized that I was only in my mid-30s, probably about 25 years to retirement, and people and companies all around the world were figuring out pretty quickly how to adjust to pandemic life. Companies were moving to digital, people were wearing masks and washing their hands, and for a little while, the world felt a little more normal. Or at least the new version of normal. The technicals and fundamentals were holding their ground and the law of stock averages was taking over. I made a decision to push my investments really hard. I increased contributions into all of the different types of funds I own and I even added some new alternative investments. I also contributed more to both of my kids college funds. To take it one step further, I even started buying physical investment properties. Stay tuned for an upcoming post about real estate investing. I watched my net worth sky rocket. For anyone that follows the market, you know it has had some big swings over the last few months, but overall, I did not waiver. I continued to dollar cost average and even if some of my funds are down, I know they will eventually go back up. Remember, the stock market returns an average of 7% a year and it has done that for decades. The worst thing to do is get out of the market when you are down. Never forget, you have not actually lost money until you sell. Buy low, hold for a while, then sell high.
Goals are extremely important when investing and I wish I had more detailed goals written down, prior to 2020. If I had goals, odds are better that I would have stuck to them. As a father in my mid-30s, it was relatively easy to put my financial goals into place. I know I want to pay for both of my kids college education, I know I want to retire before the age of 60 and I want to be able to go one one vacation (maybe in 2021?) per year. In addition, I always want to have one full year of expenses in cash and another two years worth of expenses in liquid (easily accessible) investments. My wife and I sat down together and wrote all of these goals down on paper. We then put plans in place to track and meet these goals. For tracking purposes, we used Personal Capital, but Mint is also a great alternative. Personal Capital and Mint allow you to track all of your financial accounts in one place, as well as prepare budgets and recommend investment options. They are truly a godsend. Regarding the actions we took, we actually slowed down our investing a bit to ensure we were holding enough cash. I bowed out of a car I was looking to buy and we cut our weekly spending by about 25%. We also started up all of our recurring contributions again. This planning also helped a lot with my general stress and anxiety levels.
I have learned a lot about patience this year. I am not sure what 2021 has in store for us, but I hope it includes vaccines for the virus and more effective treatments. I hope there is less uncertainty and I hope hiring picks up again. I understand many people have lost jobs and too many people live paycheck to paycheck. I sincerely hope jobs come back, but one thing is for sure, jobs will look different in the coming years. COVID-19 has fast-tracked every companies 5–10 year plans. Lastly, I hope Congress can get their act together and pass another stimulus package soon.
Here are a few tips I want to leave you with:
- You will never time the market, please don’t try
- Patience is key — remember stocks have a long history of going up
- It is important to have a diversified portfolio. Stocks, bonds, real estate, etc.
- You have not lost money or made money until you sell. It is all funny money until then
- Buy low, sell high
- Write your goals down and review them frequently
- Talk to a financial planner
