Investing in a bad market, my "4800" strategy
How I invest when the market is tanking
Introduction
One thing that can always be difficult is being invested in the market when the market is in a decline. There have been studies that estimate that up to 90% of investors lose money trading. And so many of them lose money because they end up doing what you’re not supposed to: they buy high and sell low.
I have a pretty diverse portfolio which includes individual stocks (you can see some recent stock purchases I made here), ETFs (my portfolio is here), real estate, private real estate funds, bonds, CDs, and mutual funds. However, the vast majority of my investments are in ETFs and index funds that track the S&P 500.
For the most part, when the market takes a big dip, I do NOT sell (the exception would be an individual stock that I have lost faith in, but in those cases I sell and immediately buy something else). But with index funds, I never sell, I actually try to buy more.
By leaving my money in the market when there’s a big dip, I have a chance to earn all its value back and more when the market goes back up. So far the market has always bounced back. But if I sell, I have permanently taken those losses. There have always been ups and downs in the market, and the key has been to be patient.
As always, this is a quick reminder that this is not financial advice, just myself sharing my investments, stocks, index fund strategies, what I'm buying, and where I plan to take those investments.
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Putting Money In The Market During A Dip, My 2% Rule
I’ve been investing passively (mostly automated monthly amounts) for over 25 years. However, I really started actively investing in individual stocks in 2005. Before that time, I had tried investing in penny stocks and lost pretty much all of my investment. I told myself that I would only invest in quality stocks, and also, that I would buy anytime the market was down.
I have continued to automatically invest with my index funds and ETF. I do not automatically invest in stocks, but I do try to buy in my stock portfolio at least twice a month.
I came up with a 2% rule, where anytime the market was down 2% in a given week, in addition to my automated investments, I’d buy more shares of my stock holdings and add more to my index funds.
This did get hard from 2008-2009 when the market seemingly was down over 2% every week. I was worried about running out of money to invest and I did start to get nervous that we might be seeing the collapse of the market. Seeing all the red on seemingly a daily basis was tough. But I stayed the course and it paid off greatly. The S&P closed at 4,264 yesterday so in my S&P 500 index funds, every dollar that I put in when the S&P hit rock bottom for the 2000s at the 700 mark in 2009 has gained around 510% as of the close of the market yesterday.
My 4800 Rule For Investing
The S&P closed at a record high of around 4,800 (4,796.56 to be exact) on January 3, 2022. I don’t try to time the market, but I do believe at some point in the future it will hit that mark again (it was getting close this past summer). Whether that’s 3 months from now, a year from now or three years from now, I do believe it will happen at some point and as a long-term investor, I can wait. So I use 4,800 as a benchmark.
So basically, if I bought more of my S&P 500 index fund yesterday when the S&P 500 closed at 4,264, that money will have grown 12.5% by the time the S&P hits 4,800. The S&P closed as high as $4,588.96 this past July. So any money put into an S&P 500 index fund that day would grow 4.6% when it hits 4,800.
At the end of the day, the more money I’m putting in when the S&P 500 is lower, the more it will gain when the S&P 500 hits 4,800. The lower it goes, the more it’s on sale.
As for my other stocks and ETFs, usually when the market is on a tear and you see the S&P 500 making big gains, most (if not all) of my other investments also see a gain, just at varying degrees. So I do buy those as well during down weeks.
Conclusion
Buying when the market is in decline can be tough and can require a strong stomach. But knowing that I’m buying at a discount when the market is down has always paid off for me.
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