A lot of people will be looking at this market crash in the years to come and remember the great buying opportunities, but not me. I remember when this whole mess started, I was holding my Bank of America stock which I bought at a 10% discount and was ready to make out like a bandit. Well I didn’t and the market started its slow descent south (before falling off multiple cliffs). I would sit there and think to myself “Well it can’t get worse”. As we have all learned, yes it can. This is the lesson I’ve learned, “The markets/stock can always get worse”.
Why is this lesson important?
During bull markets people develop a sense of euphoria. They seem to forget that there is risk associated with equities and begin to take unnecessary risks. They focus on the infinite upside and ignore the finite bottom. However, all bull markets come to end and that’s when the lesson comes into play. One day the market/stock will drop 5% and they’ll buy more stock. The next day it will drop another 5% and they’ll buy even more in hopes of doubling their money. Of course on the third day it ends up dropping another 5% but at that point they’re all out of money so they buy using leverage. The stock continues to drop while the investor sits there saying to themselves “well it can’t get any worse”. It’s this reason that so many retiree’s got caught in the crash because they assumed it things couldn’t get any worse.
Now as a young investor knowing just how bad the market can get is a sobering experience. You just can’t get that kind of experience from reading about past crashes. With most of my investing life ahead of me I feel I’m better equipped to make my investment decisions:
- If I’m considering buying a risky stock I do it knowing that things can always get worse.
- If I decide to apply for leverage to invest in a down market I do it knowing that things can get always worse.
- When deciding my age appropriate asset allocation I do it knowing that things can always get worse.
Well if things can always get worse then why invest?
This lesson isn’t a testimonial to not invest or sell at the first sign of trouble. The market is still the best place to grow your money but you need to have a plan with proper risk analysis. If your only risk analysis is “Well things can’t get that bad” then you shouldn’t be in the market. Invest knowing that the market can potentially drop by 50% or more and account for that potential scenario both financially and emotionally. Once you’ve done that then you’ll be fine.
Now I just need to keep this lesson fresh in my mind because in 20 years this whole thing may not have seem so bad and I could open my self up to more risk. Any suggestions? Maybe getting it tattooed across my knuckles?