At the time I am writing this post we are currently going through possibly one of the biggest "black swan" events ever recorded in history. This event has caused the global economies to be harshly impacted.
This black swan event is a pandemic known as COVID-19 (coronavirus). Due to this pandemic there have been unimaginable numbers of small business's closed and hence millions of jobs lost around the world.
In the midst of these job losses comes great economic pressure and panic. And due to this the stock markets around the world have plummeted. Hence I think it is ideal to have a financial plan prior to and during ANY economy crashes.
Now although sad news comes with an economic crash, it also leads to great opportunity for investors. This is where some serious wealth can be created. It can advance your journey to financial freedom by years!
However many people are not in the financial position to invest during a financial crisis. This is where firstly you MUST assess your position prior to investing during an economic crash. So the first step I believe you should be taking is too.....
Create an emergency fund!
Now this economic crash is the PERFECT example of how important it is to establish an emergency fund. Take it as a lesson! Countless people around the world right now are being made redundant and left jobless. With that it means you are left with no income...
Imagine having no emergency fund or savings, no income but a bunch of bills to pay just in order to survive. It's a position no one wants to be in and can lead to devastating times for an individual. That's why it can not be emphasised enough.
MAKE SURE YOU ESTABLISH AN EMERGENCY FUND
That is setting aside around 3-6 months of your living expenses minimum in order for these rainy days or periods. It is however too little too late if you find yourself in an economic crisis with no emergency fund and no income.
That's why prior to a crisis you should be (need to be!) setting aside a small portion of your income in order to build up this emergency fund.
What you should be doing during an economic crash?
During an economic crash emotions are high. Very High.
In fact emotions are that high that any little sign of news will result in a change of share price. Warren Buffet has even highlighted during the current crisis of how the markets have become based on emotion. Good news results in the price skyrocketing and bad news sends it spiralling in the other direction.
In times like these people become very protective and sensitive about their money. To a point they lose sight of the bigger picture.
There is no arguing the power of the stock market. Historically over time it is said to produce an annual return of 7%. Now this is over a long period of time. Emphasis on the LONG. Take a look at any industrial average over a long period of time and you will see!
What you should be doing in an economic crash is just to BREATHE. Take a step back and make decisions on a long term approach. The market has never completely collapsed till this day. Yes there have been dramatic sell offs and market crashes but in the long term the market has increased in price!
Don't get me wrong there is money to make in the short term. But personally I would start to consider this gambling so won't show much light to it. If you choose to go down this path your risk levels must be very high and I wish the best to you.
By taking a step back you have to realise the worst thing an investor can do during an economic crash is sell their portfolio as its value plummets (unless financially you desperately need this money.) This is because why sell it for less than it was worth a week ago or a month ago. If you can afford it, wait it out, may take a few months, may take a few years but you will thank yourself in the future for not selling resulting in HUGE losses.
** A key point when discussing long term approaches is this assumes you are investing in business with an excellence history, a competitive advantage and a profitable balance sheet. More commonly and safely blue chip stocks.**
Now, if you have identified that you are in the position to invest.
It's time to grab this rare opportunity to build some incredible wealth!
And the best way I believe that this can be done is with a dollar cost averaging approach.
How to make money during an economic crash!
Dollar cost averaging! This is where as an investor you strictly invest a certain amount of money at regular intervals. That being for example, investing $1000 every month in the stock market. You don't look twice at the price per share, you simply invest $1000 every month. By doing this you lose the option of trying to time the market which is very important! As no one can do this!
Now it is quite obvious share prices go up and down. So that $1000 you invest at each interval will result in different amount of shares. For example if a share price was at $20 you would be able to buy 50 shares with that $1000. ($20 x 50 = $1000)
But all of a sudden the next time you invest the price has dropped to $10 a share! What does this mean? It means your $1000 can now get you 100 shares in the company! ($10 x 100 = $1000). So at the end of this your overall stake in the company is 150 shares with $2000 invested at an average share price of $15.
This is what essentially the dollar cost averaging method is. And it is best used by long term investors as they can ride the ups and downs benefitting from any dips in the market that they happen to catch to lower their average share price on that particular company.
During a crisis or economic crash I think it is important to try implementing a dollar cost averaging approach. Most people (and I am guilty of this too) make assumptions and try guess when the bottom of the market is. Thinking things like:
"I feel that the share price is going to go even lower in the next week, so I will wait."
Truth be told, no one knows. The market could keep going down, it could go up and then crash harder, or just go up. All these situations more times than not will leave you kicking yourself always saying I wish I invested "then."
This is where dollar cost averaging can make you money during an economic crisis. A crisis being when you can successfully identify a dramatic down turn of the market, or a bear market, not just a bad week of trading. During these crisis to make as much money as possible you should aim to decrease the periods between your investments. That meaning for example instead of investing every month you invest every fortnight.
And where and if possible increase the amount you invest every period. Only if though you are in the financial situation to do! If you invest wisely and remain disciplined you will thank yourself months or years down the track when the markets recover, flourish and all you see is green in your portfolio.
Reality of dollar cost averaging
Now by doing this method you have to be comfortable with the fact in the short term you will most likely be losing money. You will be investing quite possibly as the market keeps going down and down. HOWEVER like the market always does it should bounce back! And when it does you will be sitting there licking your lips?
Well you have been buying all through the decline and even the start of the incline therefore your average share price you have purchased is much less than what the company was valued at before the crisis!
Your average share price is quite simply when you invest multiple times into one company at different prices. There is then an average price you have paid for those shares. Now during dollar cost averaging on a bear market or financial crisis you are decreasing your average share price for that particular company.
Then when the company/stock market recovers and rises again you will be sitting back benefitting as the value you bought in will be more likely than not less than when it recovers!
It is really that easy. And it is not exciting. Investing shouldn't be, take for example Paul Samuelson quote:
"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
There is no scientific complicated way to making money during an economic crash. Essentially everything is on sale! All you need to focus on is:
Investing regularly into the markets
Take emotion out of your investing
Invest in blue chip or well established successful companies
Be prepared to lock your money away for months or years until you get your desired results!
During any huge economic crisis huge opportunities arise for investors to build some serious wealth. But before you take these opportunities you must first assure you are in the right financial position.
If you are in the right position then it's time to make some money. And instead of being scared and trying to time the market. You should consider taking a dollar cost average approach. This being where you invest a certain amount over regular periods during an economic crash. This is so you can benefit as much as possible from any low points that occur.
It also avoids you trying to sit back and time the market! Trying to time the market can be the biggest killer when it comes to investing. Instead you should aim to just buy in regularly as the market moves and watch your money increase rapidly when the markets recover and time goes on.
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