Market crash: Staying the course!

In the midst of the coronavirus pandemic, our lives are turned upside down; From the youngest to the oldest, different social classes and different countries. Everybody is threatened by this virus. For the lucky ones, it will only survive in their body for a while, creating many inconveniences. But for others, it can unfortunately be worse. It is precisely this virulence that creates an unprecedented crisis on a planetary scale. The world has never been struck as it was on this spring 2020.

The entire planet is locked. Planes stuck on the airports, closed schools, prohibited gatherings. The world faces one of its worst recessions since the Great Depression of 1929. «With the partial exception of the black plague in Europe in the fourteenth century, each major pandemic was followed by a global recession … I don’t think that there are good reasons to think that it would be different this time ”, observes Professor Robert Dingwall, a researcher in social sciences at the University of Nottingham Trent in the United Kingdom. This recession has ended a decade of prosperous market growth.

This chaos created stress that pushed many investors out of the market. For instance, some people were out of cash as a consequence of a job loss, others wanted to build up an emergency fund quickly in order to overcome any potential problems. But the vast majority was driven by fear of losing money. Our brain is hardwired to take decisions when subject to high stress. But jumping in the stock market is an implicit agreement to deal with the associated risks. For my part, I am a fervent believer in setting expectations and working around an investment strategy. We have to be well prepared to face challenging times. Being a FIer myself, I strongly adhere to five golden rules to help me stay the course.

• Rule number 1: Always stick to your plan!

To stick to a plan, you first need to have one! and to have a plan, you need to know what are your life objectives. What are you driven by! Many people do not necessarily know where to start from, I would recommend due diligence. The Internet is an endless source of information. Everybody wants to make money on the stock market, but your strategy will be determined by your goals. Remember, money is a mean, not an end!

If you’re reading this blog, you’re most probably not interested in earning quick money in the stock market to buy a brand new Tesla. We are all here to achieve our financial freedom, share our experiences, and learn from each other. Sharing my own experience will certainly help you correlate with all the information found on the internet to build your strategy. Having a plan beforehand will lead you to informed decisions in times of crisis. The worst choices people can make on the stock market are generally driven by intense stress. The only catalyst is to stick to our plan. When you take a step towards financial independence, everything is «long term». Achieving our FI number will be the result of a lot of patience and discipline. The market continuously swings up and down and no one can predict it, so you have to stay the course and ignore the noise around you. It is important to build your strategy during financially prosperous periods and never play it by ear. Chances are that it would be a disaster!

• Rule number 2: Accept the stock market cycles!

We must accept the fact that the stock market has its ups and downs. it should be unquestionable, same as would be a migration of a flock of barnacle geese during autumn.
So by accepting this fact and investing in the long term, you’ll minimize your exposure. Personally, I buy, hold, and occasionally do some asset allocation if needed. This helps a lot in managing the stress that market crashes can provoke and most importantly, mitigate the risk of losing money. A study has been conducted by Fidelity on which they assessed the performance of its clients’ investment accounts between 2003 and 2013. It turns out that the best performing accounts were either the inactive ones or the ones of dead customers.

I almost lost 23% of my portfolio at the end of March. It was a very stressful period, But by sticking to my rules, I’ve been able to avoid going out of the market and I found the courage to invest more. I did it against my instinct, but I know that I was doing the right thing. Because, inevitably, the market will recover. I just have to stay in, and continue to contribute regularly as I have been doing since the beginning.

• Rule number 3: Dollar Cost Averaging

Dollar-Cost Averaging (DCA) is a cost-spreading strategy where the investor regularly invests a fixed amount in dollars in a given investment. The investment usually takes place every month, regardless of what is happening in the stock markets. This strategy dilutes the risk of losses caused by market fluctuations, in addition to having proven itself to be a more effective method than lump-sum investing. Several calculators on the internet would allow you to simulate the gains generated according to your investment criteria. In the community of «financial independence», this technique is very popular, because it allows you to assess your savings rate on a month to month basis. This is an important metric that allows budgets to be adjusted and expenses to be optimized. Besides, spreading the costs makes it possible to establish a savings/investment routine that is very stable over time.

• Rule number 4: The stock market will always recover from crashs!

History has proven it, North American markets have experienced rapid growth in recent decades. If we observe the evolution of the S&P 500 and the Dow Jones over time, it is clear that an investment made 20 or 30 years ago would have more than doubled today, despite market crashes. For example, $ 100,000 invested on September 12th, 2008, in an index fund composed of 60% stocks and 40% bonds, without rebalancing and with dividend reinvestment, would be worth more than $ 230,000 these days. It is a cumulative return of more than 130% and a total annual compound return of 8.7%.

Warren Buffet, the best investor of all time, recommends to trust the market and said: “We still live in an uncertain world. What is certain is that the United States will progress over time. ”He is famous for a reason, it’s because he succeeded in doing what no other human being has been able to do, becoming a billionaire by playing with individual stocks.

• Rule number 5: The stock market is the best performing portfolio that exists!

According to JL Collins, the best investment you can make is in total stock market index funds. There are several reasons why index funds are attractive. First they have minimal management fees and second because they are very diversified. By buying a few shares of an index fund that mimics the market, you are actually buying a tiny fraction of the economy of a particular country or industry. This represents a very diversified range of stocks and bonds, not only cross-industries but also cross countries. In fact, large companies like Apple or Amazon are big enough to reach other foreign markets. JL Collins recommendation is the well known VTSAX from Vanguard, but there are plenty of them that we will cover in a separate article.

Index funds are known to be «Self Cleansing». They gather such a big number of businesses that even when some of them go bankrupt, they will be replaced by many others that are new in the market. This is why Total stock market Index funds have a steady pace.

The Dow Jones Industrial Average is a perfect example, since inception in 1896, all the 12 original companies have been replaced. The latest was «General Electric» which had to be replaced in 2018 after being in the portfolio for over 100 years. among the companies that have also disappeared are some giant companies such as Kodak, Polaroïd, and Xerox. Nobody could have predicted what happened to them. They had to be replaced by more efficient companies such as Apple, Facebook, and IBM. So why trying to bet on the next most performing company if you can just buy a fund that does the selection for you at a very low cost!

In conclusion, I will quote John C Bogle, considered the father of index funds and the founder of The Vanguard Group:

«Invest in the stock market and diversify, buy at a low price and invest for the long term …. Time is your friend and impulse is your enemy. The market performance will be your best investment for a lifetime»

….. To meditate!