Thank you for all the feedback over this past week. This works best with questions and already we have seen a very common theme. Many of us are wondering if this is the right time to invest. You are not alone. Every day the financial minds of the world debate this on conference calls, through emails and on TV. Beyond those in the industry, there has been a new influx of money from the younger generations aimed at investing. Online brokerage accounts are opening at very high rates and banks are reporting large influxes of cash with directions to invest from their younger clients. This proves two things. One, many have been saving for a long time with an eye on a future opportunity to invest. Two, we are all left wondering if this is the once in a lifetime opportunity we have been waiting for.
We are all left wondering if this is the once in a lifetime opportunity we have been waiting for.
Let’s address the elephant in the room first. No. This is currently not the best opportunity of your lifetime to invest, but it is a good time to start. North America is currently experiencing record job losses, death rates and losses to our key industries which is a sever cause for concern. Why then is it even a good time to start? Because the market is down 17% from 2 months ago and there are two golden rules for investing:
Over the long run, the market goes up so you should own the market;
You cannot predict the precise ups and downs of the market.
Warren Buffet provides us with a great example for a strategy moving forward. His company, Berkshire Hathaway, is currently sitting on $138 billion of cash which he has earmarked for future investing. Recessions take years to develop and markets have several ups and downs along the way. This is an unprecedented cause for a recession and therefore, more than ever, we need stability in our economy before jumping in full force. However, he also knows the two golden rules which means we need to stay invested. He has $138 billion earmarked for the future but has $650 billion still in the markets.
Much like he is doing, we do not want to sit completely in cash because of the two golden rules, but we want to tread carefully as we dip our toes into this uncertain marketplace. If we have cash that is not earmarked for our savings and we do not need to touch it for over 2 years (better if it is 3-5 years), then it is time to get in the game. We will invest in tranches meaning our first investment today should be only 20% of our earmarked funds. Like Buffet, as we see stability increase, we will look to invest more.
We will invest in tranches meaning our first investment today should be only 20% of our earmarked funds.
Investing can be very difficult, or very simple. Throughout my education it was often drilled into my head that you cannot beat the market – so you need to own the market: i.e. stock picking is often a losing game when matched up against owning the market. But what is the market and how do we own ‘the market’? For our purposes, the market is the S&P 500. The S&P 500 is an index of 500 stocks that are listed on US stock exchanges. Among others, it is made up of Apple, Microsoft and Facebook but also Wal-Mart, General Electric and JP Morgan. There are many financial managers in the world and with all their methods such as stock picking, options, and leverage, the majority cannot outperform the S&P 500.
Now that we know what the market is, how can we own it? We use an ETF – a single stock that represents the entirety of the S&P 500 index. One stock and we can own 500. We can buy this ETF on stock exchanges around the world. If you have never done this before, fear not, we will cover a step by step on buying next week.
To recap, first and foremost we need to acknowledge the severity of this crisis. This is not a blip on the screen – this has never happened to us before. It could get far worse before it gets better but in the end, things will improve. The market will rebound. To ensure we are properly positioned, we invest 20% today to take advantage of a down market but acknowledge there could be better opportunities ahead. Timing is impossible so we spread our risk to ensure we are always in the best position. We are not gambling, we are investing.
Timing is impossible so we spread our risk to ensure we are always in the best position.
To give some insight on my own strategy, I have been waiting for a recession for several years and have been saving to invest at the right time. We face drops in the market every 10-15 years and while I did not anticipate the severity of the crash (as no one did) I have been very cautiously trying to take advantage. Pre-pandemic, my investment portfolio was made up of 55% cash. Since March 15, I have invested almost 40% of my earmarked funds – in the market as well as in a few other choice industries. Over the last six weeks I have bought the market, as well as energy, gold and financials, and am now waiting to see how this pandemic unfolds. The strategy I am taking is slightly more aggressive than what I am telling you to do today. I will touch on why you might look outside of the market as an investment option as we move forward. For today, I am recommending to own the market as a first step.
Tell us what you’re interested in most. Are you wondering the risk of your industry or company? Want to know what the property market is doing? Thinking of investing? Leave us a comment or send us a note and we will answer that question for you.