How to invest in stocks during a Market Crash?

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful"
warren buffett
- Warren Buffett

During the March Stock Market Crash pretty much all my family members and some of my friends asked me how to invest in stocks. Given the current market turmoil, there is an increasing appetite for buying stocks. 

This is what you need to know should another crash materialize (e.g. should the liquidity problems turn into solvency problems in the wider economy later this year)

These are the 10 Rules they have learned

Table of Contents

1. Invest in Stocks gradually on the way down

When and how to invest in stocks? If you have directly or indirectly prepared for a period of financial stress and have available cash you may consider starting investing when there is a market crash. A good strategy is to build rules and stick to them — either based on certain index levels e.g. S&P 500 at 2700 invest 20% of savings, 2500 another 20% etc. or based on timing (slicing every few weeks since we have no clarity which way the market may go and when it will bottom out)

2. Do not chase an upward trend in a bear market

One of the common mistakes we see is people chasing upward trends because of FOMO — Fear of Missing Out (when stock market recovers after a big crash for a few days giving hope of long term gains). It takes more courage to buy according to predefined rules which often means buying when everything is gloomy and stocks lose massively. Buy on days when stocks are massively sold not bought. In the long term it pays off. Do not be tempted by rebounds that may prove short-lived.

3. Do not try to time the market

Even the best investors struggle with market timing. In fact most hedge funds (even the most prestigious ones) made substantial losses in March

The market can turn rapidly both ways and while you may avoid some bad days avoiding just a few good days can be extremely detrimental to your long term performance as illustrated by a study done by Fidelity.

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Also, it is extremely risky to use leverage since additional debt implies you must be correct on timing

4. Invest, do not speculate

how to invest in stocks - buy the whole market e.g. S&P 500 ETF

You may not get spectacular 300–400% returns overnight but your money will be relatively safe if you base your decisions on sound financial statements and diversify. ETFs (including Bond ETFsare a great way to invest in indices without taking idiosyncratic risk (e.g. Luckin Coffee dropped 80% in one day in March on uncovered fraud — as Warren Buffett says “Only when the tide goes out to do you discover who’s been swimming naked”).

Ask yourself the question — am I more qualified than a professional investor to predict which industry player may outperform the rest of the market? Do I know how the landscape post-crisis will look like? Even if you suspect knowing first-order effects are you sure of the second and higher-order effect (to Nicholas Taleb’s point).

5. Avoid binary outcomes

How to invest in stocks to avoid drawdowns? Each crisis has its own most vulnerable industries where outcomes can be binary — in 2008 some Banks went out of business and as an investor, you may have lost everything. The Coronavirus crisis has other prime candidates for such outcomes, airlines can be nationalized and hotel/tourism industry players can go bankrupt should the distress last longer. You want to avoid these investments until there is more clarity on consumer confidence.

Since these recover now you may think it was wise to invest at some point but the key is that you can’t base the rightness of a decision based on an outcome but on a probability it would occur. And in March chances were high there would be lots of Airline Lehman Brothers (in fact, a lot materialized — LatAm, Virgin Australia, etc)

Solution for how to invest in stocks avoiding binary outcomes: Choose Index Funds!

6. Look for financially resilient firms

If you do invest in single names, do not believe blindly in potentially meaningless dividend yields based on past data unless it has been confirmed by the management after incorporating all the outlook related to Covid-19. Instead, look at balance sheets with low debt and build-in resilience (cash). These firms may outperform and even acquire weaker competitors in the current environment. Be cautious though, you can’t predict the impact of post-Corona market on Business Models.

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7. Keep Some Cash

Ray Dalio now infamously said a few months ago that ‘Cash is Trash’. While he is one of the best thinkers in Finance the remark was badly timed. Even in the most conservative scenarios keep some reserves. This is primarily a health crisis and while an economic crisis unfolds having a safety net is paramount. Additional unforeseen tail risks always exist (think Oil Price crash or Trade War on top of Coronavirus etc.)

8. Diversify in other assets including currencies, commodities and high quality debt products

It is difficult to predict which countries may relatively outperform. Keep your portfolio diversified geographically (e.g. Asia, Europe, US) and product-wise potentially including commodities like Gold that may outperform in low real rates / high inflation environments. Consider very high-quality debt products (Treasuries or Investment Grade Debt Bond ETFs). Here is a good guide on how to protect your Stocks Portfolio.

9. Stay informed but remain cautious

Knowing how to invest in stocks is also about adjusting your strategies as there is more clarity about the outlook. But be very careful with financial experts and consensus — when you see opinions converging usually something else will happen

10. Duration of the coronavirus pandemic is key

The risks are still skewed to the downside (it can take significant time). While there is a discount to peak market values and positive catalysts may materialize (most pharmas are working on Coronavirus vaccines and mitigating drugs) the time it takes and the change of behavior will alter the markets significantly.

The impact on people’s health even when cured and society at large is at this stage still uncertain. Stay safe and healthy!

I want a hands-off investing approach, preferably through a diversified Index Based Strategy

Diversification is key if you want to sleep well. A mix of stocks and bonds performed well in the past but this is challenging in 2020 when yields are low. You need to consider your goals and construct your portfolio accordingly

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You may also want to add some Gold to your portfolio. We have analysed how a stocks & gold performed in the past 30 years. The conclusions are interesting.

I am happy to invest on the way down and have tolerance for short term losses. I want High Returns only from Stocks

If you can monitor the market fairly regularly and invest on the way down

and have a Medium Term Investment Horizon you may want to read how to deploy capital through a COVID-19 100% Stocks investment strategy. This assumes you have a time  to cash out of your investment when the S&P recovers. It doesn’t matter if the S&P 500 falls to 1,600 points this year. Read more.

DISCLAIMER – the views expressed here are my own personal views. The above is a simplistic generic scenario analysis. The information provided is general in nature only and does not constitute personal financial advice. You should consider the appropriateness of the information having regard to your objectives. You should consider your financial situation and needs. Seek professional advice where appropriate. This website is not affiliated with any of the investment firms for which products are described here.  These are meant to be illustrative investments. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to in this article, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. 


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5 months ago

Simple but sound advice.This is a great list, more people need to see this when it comes to investing.

5 months ago

Don’t bother with balance sheets. The market has already picked those bones clean. Don’t invest it individual companies.

Listen to this guy’s earlier advice, pick total market ETFs, or at most sector ETFs.

5 months ago

What do you think about investing during this Trump time? What if Trump messes up this virus more and even more people die? If he gets re-elected would you invest more or pull everythingl out? What if sometime later there is another similar virus or something even more serious and trump messes it up even more ,and more people die and economy gets worse etc.

3 months ago

    The single name list is long with broader tourism – bottom line: avoid stock picking. Icahn just lost $2bn :