How to invest when the market crashes (from real experience)
There is a truth that we must recognize: the market goes up and the market goes down.
It just happens — like the rule of nature. Spring comes, summer is not far away. Autumn will not stay forever and soon winter will come. But then spring will return, followed by summer….. you get the point.
The market cycle is just like the season — there are times when it gets heated and when it becomes over-heated and too irrational, people started to wake up and cool down, and it goes down, and down…. Until “good deals” are everywhere, and people rush in to buy and invest, and it goes up, and up…. The cycle continues.
Similar to the season, there is a rule of how we farm. We place seeds when it is spring and harvest in autumn. Don’t underestimate this old wisdom. Many have profited again and again with this simple rule of farming applying in the stock market. How?
Spring — alike to when the market is going flat, it is awakening, things are sprouting but not blooming yet, slow growth may be observed but there is no heated investment, this is the best time to place our seeds (money).
Summer — alike to when the market is heated (and perhaps overheated). Prices are blooming everywhere, and fast, rapid growth is common.
Autumn — alike to when the market started to slow down the speed of growth, some may even start to show sign of fatigue and falls slightly like the yellow leaves. This is the time when we should harvest our investment to avoid the winter killing our crops and fruits.
Winter — alike to the cold, freezing market where people are fear to put money in the market. They may even run to escape from the market given the unfavorable environment of consistent falls and lowering of prices. The overall movement of the market is down, and down more, almost seem never-ending.
Applying the law of farming in the market requires us to monitor a bunch of indicators that would tell us whether the market is undergoing spring, summer, autumn or winter. It requires some learning of the indicators that are technical. Do you want to learn the technical jargons? Do you want to spend numerous weekend learning and studying about the indicators or you rather spend quality time with your family and friends?
I did learnt the technical side of the market, here are what I found:
(1) it takes more than 100 hours to REALLY learn
(2) leaning is just the first step, the more challenging part is to apply it in analyzing the market (which takes at least an hour a day or a few hours a week)
(3) applying it is not the most challenging part, the hardest is to know whether your analysis is correct or not and be able to invest based on the strategy. Unlike the exam, there is no model answer. No one is going to tell you whether you are right or wrong until you place your previous, hard-earned money in the market and the market will prove you right or wrong. Nonetheless, it may be too late to find out when you are wrong. If you are right, you may get cocky and believe that you have resolved the mystery of stock investment and you are the god of investing. It is easy to get carried away and rely every investment on the same set of analysis and start betting more money….until you lose miserably. When once or twice, the market tells you that you are wrong, you may not believe it. You may think that this is an exceptional case, until the “exceptional case” happens again and again. It is the human emotion play again. We get confident and we forget to respect the market, and respect the odds.
So the difficulty or challenge is not learning about the technical, but overcoming our own emotion in the subject of investing. That is the core reason why we cannot profit consistently.
How? Let’s go back to the question: how to invest when the market crashes? When most people are fearful, how can we overcome our emotion and become a robot to invest greedily?
We are human, after all. And the elements that make us humans are precious. Yet, if what makes us human is what causes failure in investment, can we be robot once in a while when we make investment decision?
Yes, of course, yes. And after the technical analysis experience, I search for ways which I can invest like a robot (because it is proven that our emotion is our greatest enemy when it comes to investing). There are 2 ways:
(1) We hand over our money to robo-investing. There are more and more apps or services that allows us to invest in a robot way — we set up a fixed amount of deposit each month or each week and the robo-investing apps or service will automatically invest that sum to a portfolio of our choice.
(2) We can use the strategy of Dollar-cost averaging: meaning that we invest the same fixed amount each month or week (or any regular period we decide) into the portfolio. That is, we act like robot — without thinking invest that same amount no matter how the market is doing. Over time, you will be able to “average” the cost of the investment.
If you have limited capital to start with, or if you have a larger lump sum to invest for stable profits (e.g. retirement portfolio), these two approaches would outperform the analytical approach simply because they are less affected by emotions. Although the farming strategy works, if you don’t have enough time to monitor the market, if you don’t want to invest at least 100 hours to learn and then at least a few hours per week thereafter, if you prefer to spend time with your family and friends on weekends, the passive investing strategy (i.e. the robot investing strategy) would be more suitable for you.
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