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Investing 102

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The Bad Times Investment Guide

January 8, 2020

Sometimes it’s hard to read the economic news. One day you’re sitting pretty, and the next day may include a slight panic attack brought on by news or current events. If you catch yourself wondering if you’ll ever be able to retire–don’t start to worry just yet. Investing through the bad times requires sharp skills if you want to come out ahead, but it’s not an impossible task. Here’s what to know:

  1. A bad economy and a bad market don’t always go hand in hand.

    The market is a predicting machine. When things are expected to improve soon, stock prices will rise. This confuses people who look at a dismal economy and wonder how the market can keep going up. But when investors think things are getting worse, prices will sink. They also sink when things are uncertain. In fact, the market hates uncertainty most of all. 

  2. Don’t try to find the bottom.

    If you or anyone else could reliably spot the bottoms, you’d be a billionaire by now. The problem with waiting on the sidelines until things are safe is you may miss the best bargains you’ll see in years. When the market swings up, it often does so with a vengeance. Miss those big upswings, and your performance will be decimated. Instead, start nibbling at stocks when the market takes a big plunge. Buying a little here and a little there, you’ll get the best prices on some of your buys without totally missing the sale.

  3. Keep some safety stocks, but try picking up a few riskier issues too.

    When things are tough, everyone wants to own big, safe companies with solid dividends. In a panic, their prices won’t drop nearly as much as the smaller companies’ shares. You’ll want to own safety stocks because their dividends cushion your portfolio and the companies have almost no chance of bankruptcy. But the big money is usually made on companies that at least look riskier. 

  4. If you know you’re in a panic, keep away from the sell button.

    How can you distinguish a panic from a measured retreat? In a panic, nearly every stock will be down. Did every company in the S&P 500 really lose value on the same day? Of course not. If you can’t resist the impulse to sell something, make sure you sell a poor prospect–not a company that will go on churning out sales no matter how bad the economy gets. 

  5. Debt, cash flow, cash on hand, and actual earnings always matter.

    They matter more when things are bad. In a good economy, a company can sometimes get by on a wing and a prayer until their idea starts paying off. In a bad one, they’ll be lining up at the bankruptcy court. Spend plenty of time researching your picks, and be selective.

  6. Ask the tough questions.

    Ask, “What if the economy doesn’t recover for years? What will happen to this company?” If the company sells razor blades or toilet paper, it’ll probably be just fine as these are things that people always need. You may not be able to sell it for what you paid for a while, but your dividends will continue. Your shares will gradually be worth more, even if it takes the market a while to figure that out. On the other hand, if the company is a chain of luxury restaurants, it may not survive long enough to see a recovery.

  7. Walk away for a while.

    Streaming quotes are a hypnotist that can make you do foolish things. If you’re a wise investor, you have emergency cash in the bank, food on the table, and a roof over your head, then relax. Go to a movie, take a day trip, or read a book. Check back later. 

  8. Do nothing.

    If you can’t bring yourself to buy during a market slump, try doing nothing. Doing nothing is often a reasonable strategy for getting through market panics. You’ll still do quite well if you can wait it out, even though your results won’t quite match those of investors with the courage to buy.

  9. Never bet it all.

    Overconfidence is lethal in any market. Make small and medium-sized buys based on your assessment of the odds, but never sink everything into one play. No matter how great something looks, something can always go wrong.

  10. Don’t forget the alternatives.

    Land will never be worthless. Neither will houses in good locations, close to transportation routes and major urban centers. If a good deal for land or property presents itself, snag it up. And if you’re not into doing the heavy lifting yourself with real estate, REITs are the perfect option for those investors looking to remain passive. Plus, REITs have the potential to achieve returns between 11-18% – that beats the stock market by a long shot!

    Precious metals tend to go up when the economy goes south, so they’re good insurance. But don’t buy them after everyone has bid them to astronomical levels. When the economy gets stable and boring, no one will want the metals. That’s the time to scoop some up so you’re prepared for the next slump.

  11. Remember that the only thing you can count on with economics is change.

    Things never stay good; they never stay bad. The pendulum swings back and forth. You can use that motion to your advantage if you keep your head.

    Bad times can work to your advantage if you can wait them out. When the good times come back, don’t forget what you learned. The next time those prices start getting ridiculously high, sell some shares so you’ll be ready for the next slump.

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