Experience is a Great Teacher

How are you doing today? I hope that you’re ignoring the gyrations of the stock market and going about your business of self-isolating, washing your hands, and self-distancing. They might not be the most exciting activities, but they will flatten the curve and help to avoid overburdening our hospitals.

As I approach my golden years, I’ve come to accept the maxim that experience is a great teacher. Additionally, I’ve also realized that I can learn from other people’s experience as well as my own. I need not make every single mistake myself. Watching others’ mistakes can be just as instructional.

Today, I’d like to share one of my investing mistakes so that you don’t have to make it yourself.

Back in 2008, the stock market tanked. I remember hearing about the demise of Bear Stearns, and I was shocked. I don’t recall why it was so upsetting since I wasn’t a hedge fund manager at the time, nor was I an economist or any other kind of expert. All I know was that Bear Stearns was a major investing bank and that it’s demise meant that something very bad was happening in the stock market.

So what did I do? I made the second worst mistake available to me. I stopped investing while the stock market plunged.

I’ve made no secret of the fact that I’m a buy-and-hold investor. My investment plan is simple. First, save money from each paycheque. Second, transfer those savings to my investment account. Third, buy units in my chosen exchange-traded funds. Fourth, rely on the dividend re-investment plan to invest the dividends. Fifth, go back to the first step.

I’ve designed the plan to take advantage of dollar-cost averaging. Each month, I invest in my ETFs regardless of the unit price. I completely avoid trying to time the market. “Is this a good time to buy?” is a question that I never ask myself. When I have the money, I buy into my ETF – easy peasy lemon squeasy. This method of investing is know as dollar-cost averaging. I first learned about it in The Wealthy Barber, a great book authored by David Chilton.

Back in 2008, I was not as smart as I am now. Twelve years ago, I freaked out and I STOPPED INVESTING!!!

This was a huge mistake! I should have continued to dollar-cost average into the market during the six months between the demise of Bear Sterns and the recovery which started in March of 2009. I would have been buying during the downturn.

Buying during the downturn is a fancy way of saying that I would have been buying when the stock market was on sale.

It’s good to buy things when they’re on sale. If you want a new pair of shoes, aren’t you happier making the purchase when they’re priced at 35% off? I have a feeling that if you had a choice of buying the identical pair of shoes for $100 or for $65, you’d opt to buy them for $65.

The stock market is no different. On February 22, 2020, the value of the stock market plunged. In other words, it went on sale. The Talking Heads of the media could barely keep from peeing their pants with glee! They had so much to talk about, so much fear to stoke in their viewers and readers. Buy this! Don’t buy that! It’ll be a V-shaped recovery! No recovery for 2 years! Avoid cucumbers!

Okay … maybe they didn’t say anything about cucumbers. But the rest of the statements aren’t too far from the truth.

Once again, experience is a great teacher. I’d already made the mistake of listening to the Talking Heads in 2008-2009. As a result, I did not take advantage of the cheaper prices on the stock market that were available at the time. As the recovery wore on, the stock prices didn’t fall but I did start contributing to my portfolio again. However, I could not overcome the error of not buying stocks when they were super-cheap. My failure to make the right choice 12 years ago means I’ll be working a little bit longer than I’d projected.

I see no sense in making the same mistake this time. So while I’m self-isolating, while I’m washing my hands, while I’m social distancing, I am also continuing to invest in my chosen ETFs. Yes, you read that right. I’m still investing even through this period of excess volatility.

Did the value of my portfolio plunge in February of 2020? You bet your sweet ass it did! And did the value continue to drop throughout March as the stock market roiled due to the COVID19? Again, that’s a big 10-4!

It’s been just 5 weeks since the plunge. My portfolio is recovering, just like the stock market is.

The Talking Heads won’t ever encourage others to follow my simple plan. Despite its effectiveness, my way of doing things is boring and boring isn’t good for ratings.

You see, the stock market is supposed to go up and down. It always has. It always will. Never in its history has the stock market only ever gone up, just like it has never only ever gone down. If you’re going to invest, then do so consistently and automatically. Do your research. Find a broad-based equity exchange-traded fund (or mutual fund if you insist on paying higher management expense ratios). Invest on a regular basis. Ignore the Talking Heads. They can’t tell the future any better than you can.

And in case you were wondering, the biggest mistake you can make right now is to sell your stock market portfolio. For the love all that you deem holy, do not sell! Right now, the prices are low and that’s why you should be buying them.

Like I’ve said, experience is a great teacher. You can learn from mine instead of making the mistakes yourself. Don’t stop investing right now. Stick to your investing schedule and build your portfolio while the stock market is on sale. The second biggest mistake you can make is to halt your investment contributions.

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Weekly Tip: Pay cash for your next car by making a monthly car payment to yourself for as long as possible before you head to the dealership. The payments to yourself will be the down payment, if you’re forced to finance your vehicle. Ideally, you’ll stay out of debt completely because your accumulated savings will be sufficient just pay for your next vehicle with cash.

Take a Break

I don’t know about you but sometimes I need to take a break. The world is currently caught up in a pandemic – a very bad thing. The news outlets are constantly issuing new articles – another very bad thing. It’s impossible to know who to believe, who to disbelieve, what’s true, and what’s not so true. Part of me suspects that the drive for ratings is still deeply driving the amount of pandemic “information” that is being spewed at us from all directions all day long.

Following the media from sun-up to sun-down is a recipe for anxiety and stress, so I’m going to tell you that it’s okay to take a break. Put down your phone or turn off your TV. Trust me when I say that your mind will appreciate a few hours or days of not being forced to think about the pandemic. Sadly, the bad news will be around for a little while longer.

Do something very different with your mental energy. Think about how you want your life to be structured when the pandemic is over.

Over?

Yes, over. This pandemic is not like the rising sun, which will always be there tomorrow morning. Nope – this pandemic is a global yet temporary circumstance. It won’t last forever. And every new day brings the world that much closer to a vaccine or a shot that will turn COVID19 from something to be feared into something that can be tamed.

So, again, what do you want your life to be once this pandemic is over?

And since this is a blog about personal finance, I suggest that you reflect on how this pandemic has changed your perspective on money.

  • If you had an emergency fund, was it enough? Do you want a bigger one for the next unexpected emergency?
  • Did a reduced paycheque forced you to re-assess your needs vs. your wants? Will you go back to how you spent before once if your paycheque goes back to its former size?
  • Are you as risk-tolerant as you thought you were? Or has the recent & extreme volatility of the stock market caused you to lose sleep at the same rate that your portfolio has lost money?
  • When the pandemic is over, what will you do to repair or bolster your financial buffers?
  • Will you seek out employment in “essential” industries? Or will you stay where you are because it’s what makes you happy?

Now’s the time to think about these kinds of questions because we’re staying at home to flatten the curve. That should give many of us Singletons plenty of time to make some tentative money plans for our future.

At the very least, figuring out the answers for these questions should take our minds off of COVID19 for a little while at least. The pandemic is going to cause a lot of sorrow for a lot of people. It’s impact will be deep, widespread and long-lasting.

That said, it shouldn’t force you to stop dreaming and planning for your future. The game isn’t over until it’s over.

Never forget that this too shall pass.

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Weekly Tip: Read books – as many as you can. Libraries are a treasure trove of information and entertainment. And in today’s digital world, you can download books to your e-reader.

I am not an Economist

First and foremost, I am not an economist. I write this article as someone old enough to remember H1N1, SARS, the Great Financial Crisis, and the DotCom crash. I’m quite certain that there were other economic challenges earlier in my life but I was young enough, or naive enough, to take no notice of their impact on my life.

Anyone who pays attention such things knows that the stock market is experiencing a great deal of volatility right now. Most people are scared of contracting COVID19. Businesses are shuttered. Some people are losing their jobs. Other people are trying to hoard essential products. Pictures of empty grocery shelves are everywhere.

It’s easy to be afraid right now.

Again, I am not an economist. However, you should have faith that the stock market will recover. When? No one knows. Yet, I am 99.999% certain that this is not the end of capitalism. The supply chains are still running. Grocery shelves are still being stocked. Prescriptions are still being filled.

Very smart people all over the planet are working on a vaccine for COVID19. They will find one.

What I think you should do

Do not panic with your investments! If you can avoid it, then do not sell anything in your portfolio right now. The only way to lock in a loss is to sell when the price falls.

The stock market will recover from this dip. No one knows how whether the recovery will happen by the end of 2020, or whether it will recover in 2 years. However, the impact of COVID19 will become an item in the rearview mirror when the stock market starts to go up again. Just like H1N1, SARS, the Great Financial Crisis, the DotCom crash, and all the other economic shocks that have preceded this virus.

Should you be one of the fortunate ones who has stable employment right now, then I urge you to stick to your current investing schedule. This suggestion is based on the assumption that you have a fully-funded emergency fund of atleast 6 months of expenses. If your emergency fund isn’t this full, then cut out non-essential spending until it’s nice and fat. You’ll never regret having an emergency fund when you need one!

Keep your investing schedule in place. I invest monthly. I plan to continue investing unless circumstances drastically change. A long time ago, I decided that timing the market would only drive me nuts so I’ve never attempted to market-time my investments. Instead, I opted to making regular investments into the stock market every month. Money goes in – dividends get paid & re-invested – money goes in – dividends get paid & re-invested… ad infinitum

If you have an investing schedule, then stick to it. Right now, investors have the ability to buy equities when prices are low. Again, I’m going to state the obvious – the stock market is low right now. No one – and I mean NO ONE – knows if we’ve hit the bottom of whether the stock market will continue to fall over the next few weeks. Yet, those who invest in a broadband index funds (or exchange-traded fund or mutual fund) and who stay invested for the long-term will see positive returns.

Note that I’m only referring to buying broad-based index funds and similar products during this downturn in the market. If you’re the sort who engages in stock picking, then I wish you all the best. Stock analysis is not something that I would suggest. I have no way of knowing which stocks will recover to unseen heights and which ones will crash when the underlying business fails.

Learn from my mistake

Full disclosure: I am a self-taught buy-and-hold investor who believes in dollar-cost averaging. This means that I skim money from each paycheque to invest in the stock market on a regular monthly schedule. I invest in exchange-traded funds, and I’ve done well.

However, I haven’t always made the smartest decisions with my money. I’ve made significant errors with my own investments. One of the worst decisions I made was back in 2008 when the stock market plunged. The value of the stock market was falling and I made a HUGE mistake. I stopped investing money on the way down!!! My fear took hold and I decided to wait until the “market got better”. Thankfully, I was smart enough not to sell but I wasn’t smart enough to stick to my strategy to dollar-cost average into the market.

Had I stuck to my strategy of investing money every month, I would have been buying during the market crash. This is known as “buying low“, and it’s an exceptionally good thing when you plan to hold onto investments for a very long time.

If I hadn’t erred, I would have taken full advantage of the recovery that started in 2009 and that ran up until a few weeks ago. My portfolio might have been big enough to let me retire a few years earlier than planned had I not made this monumental error.

Though I can’t remember exactly when, I did re-start my investing schedule and I’ve stuck to it ever since. COVID19 is not going to prevent me from counting to save-invest-learn-repeat. I will still move money from my paycheque to my investing account. Every month, I’ll continue to buy units in my exchange-traded funds. I will not stop regular investing this time around.

And if my income isn’t stable?

If your income is variable, or in doubt, then your focus needs to be on eliminating all non-essential spending from your life so you can squirrel away your cash. Right now, your priority has to be survival – rent/mortgage, food & prescription medicines. Everything else has to go on the back-burner until you get a handle on how you’re going to continue to receive an income.

Focus on beefing up your emergency fund. That money that used to go to drive-through coffees? Stick it in your emergency fund. Your monthly massage? Social distancing means massages are out for a while. This is a really good time to cut subscriptions to things that no longer bring you joy. Find the fat in your budget and trim it away so that you have money to live on if your income goes away.

Keep your money liquid in a high interest savings account. Allow me to state the obvious: you will need cash to get you through the hard times in case you lose your job. This is not the time to be making extra payments to your debts, nor is it the time to start investing in the stock market. Gather your money in a safe place so it will be there when you need it.

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Weekly Tip: Stop non-essential spending for the next few weeks. Top up your emergency fund. Stay indoors. Wash your hands. Stay healthy!

Some People Always Make Money

As I write this post, the world is facing the pandemic known as COVID-19. I’m not a scientist, nor am I a doctor. This post is going to be about how some people always make money, no matter what is going on in the world.

This pandemic is a prime example. Unless you’ve been living under a rock, you cannot help but have heard that the global stock markets have been a wee bit volatile as of late. Investors are losing money as the value of the equities in their portfolio drop in tune with the stock market drops.

Yet, some people will be making money right now. Why?

It’s simple, Gentle Reader. The stock market is on sale right now. Much like buying clothing in the off-season, or winter boots at the start of spring, people with money are buying stocks while the stock market is down. Stocks are on sale. This is the time to buy.

Stock Market is Drastically Down

If you have the money, then buy now. One of my favourite exchange traded funds – XDV by BlackRock – was down to $19.93/unit when I checked it at the time of writing this post. It had been near $30/unit a mere two weeks before this article was posted. The portion of my portfolio invested in XDV has dropped significantly, but guess what?

I’m a long-term investor who believes that the market will recover. Now is the time to buy more XDV shares because they’re on sale. Over time, this ETF’s value will go back up and, if I buy now, I will benefit from having bought additional shares when the price was lower than normal due to market turmoil. Do I like seeing the value of my portfolio go down? NO!!! Do I like buying dividend-paying investments when they’re on sale? YES!!!

Do you own research. Check out MorningStar. Visit the Motley Fool website and other websites that teach investors how to invest. Figure out which industries are hurting right now due to the pandemic, and determine if you believe that they will recover once a vaccine is found for COVID-19. When the panic has passed and life gets back to normal, which companies and industries will have the most ground to regain?

Keep Your Powder Dry

In the personal finance world, this phrase means having savings set aside for stock market circumstances like the ones we’re currently facing. It means having money available to invest when the stock market dips. This money is separate and apart from your emergency fund and the money you spend on the necessities of life. The reason you’ve set this money aside is so that you can take advantage of those times when the stock market goes on sale.

Full disclosure – I’m a buy-and-hold investor who believes in dollar-cost averaging. Money is skimmed off my paycheque and into my investment account so that I can buy units in my exchange-traded funds every month. I am not one of the people who has buckets of cash sitting around and waiting for buying opportunities like the ones that are on offer right now.

The people who are deploying their powder right now are, very likely, setting themselves up for some phenomenal returns over the next few years. They’re buying low because the stock market is down. So long as they hang on to their purchases through the recovery, they then have the option of selling high in a few years from now.

Successful Investors Do Not Panic

This is not the time to sell your investments! Even though they may be down, the stock market will not go to zero. The stock market will recover.

Selling now means locking in your losses. You will foreclose your ability to participate in the recovery, since your crystal ball will not tell you exactly when to buy back in.

Turn off your stock market notifications. Don’t look at your portfolio every day. Trust that the stock market will recover. The pandemic is going to cause turmoil, but the stock market has survived turmoil before. This time is not any different – the stock market will recover. You will want to be part of that recovery.

Buy low (which is right now) – hang on during the recovery (which could take a few years) – sell high (which is a few years from now).

Again, some people always make money. They do so because they invest in equities. They don’t panic when things turn volatile. They keep their powder dry. They’re around to participate in the recovery because they never sell. Be like those people.

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Weekly Tip: Wash your hands. Don’t hoard toilet paper and wipes. Stay informed and don’t panic. Don’t sell your portfolio.