Turbulent Times and Investing Lessons

(The following was originally published September 7, 2021, by Josiah on his original blog Financeisfreedom.com.)

It’s been over two years now since I wrote my last post. To say a lot has happened in the world would be an understatement.

Let’s imagine that we went back to February 1st, 2020, and someone gave you foresight into what was about to take place. They told you:

A global pandemic was going to sweep the earth.

Millions of people would die. The global economy would shut down. Offices, gyms, and churches would close. The virus would mutate and have impacts that would last more than 18 months.

Supply chains would be disrupted. Inflation would rise to levels not seen for decades. The US unemployment rate would skyrocket to 14.8% - the highest level seen since the Great Depression!

Insurrectionists would storm the United States capitol. The Taliban would regain control of Afghanistan. The US national debt would continue to balloon to nearly $30T.

If you knew all of this ahead of time, how would you have prepared financially?

Would you have taken your money out of the market and sold your investments? Gone to all cash to prepare for the inevitable market crash?

Many would have, and it would be hard to fault the logic. The world is falling apart, for crying out loud. Investments are sure to plummet, right?

Well…. kind of, but not really.

Let’s look at the chart of the S&P 500 (500 of the biggest and best public companies in the United States).

Okay, okay, the stock market is up 36% since 2/1/2020!

Pretty perplexing until you realize that company profits are also sitting at record highs. US companies are making more money than they ever have in history despite all the aforementioned craziness.

Government stimulus and monetary policy during the Pandemic has dramatically boosted consumer demand and flooded investment markets with liquidity.

Tons of money is flowing into any kind of investable assets. Stock prices are at record highs, bond prices as well. The crypto market has grown into a multi-trillion-dollar asset class. Home prices are also at record highs, but I think everyone already is aware of that!

I have a few takeaways that I’d like to leave you all with as we consider what has happened:

To succeed financially, you need to own assets.

This is one of the most important points I could stress in all of personal finance.  It’s the key to capitalism. Good assets like a business, the US stock market, or real estate usually go up over time and produce returns for their owners.

If you ever want to retire and stop trading your time for money (a job), owning assets is the best way to produce passive income.  

Additionally, owning assets is the single best way to hedge against future inflation. When inflation rises like it has in the past year, asset prices usually rise as well. If prices are rising from inflation, that usually means real estate prices are as well. It also means companies are probably making more money, which in turn translates into higher stock prices. Think about it this way: Coca Cola used to sell an individual soda for 5c. Now they sell it them for $1 or $2. If you own Coca-Cola stock, you benefited from that rise in consumer prices over time due to inflation.

You might get a cost of living raise of 2-3% per year with your job, or you might not. Go buy assets so that you’re more likely to keep up financially with inflation.

It pays to not panic sell your investments.                

The stock market in March of 2020 did fall. It dropped steeply and rapidly, resulting in a nearly 35% decline. Stocks were falling 10% a day! It was truly a scary time. No one had any idea what was going to happen, but one thing seemed certain: things were going to get extremely bad.

But, lo and behold, the proverbial clouds parted the sun appeared. The markets quickly recognized that this too would pass, and stock prices bounced back. The US stock market is now worth more than double what it would have been if you would have panicked and sold during the crash. And that growth only took a year.

When the world is in chaos, buy all the investments you can afford.

As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful”.

It’s so hard to do, but it would have worked once again.

My largest investments are in globally diversified stock index funds. I have peace of mind knowing that the entire world’s economy isn’t going to collapse permanently or go bankrupt, so it’s easier for me to buy as prices are plummeting. (If I were instead buying individual stocks during a panic, I would be pretty fearful they could be going to zero). This is a huge benefit of holding diversified funds.

The future is wholly unpredictable

Markets were booming in 2019 and no one knew what the catalyst would be that would cause our next market crash or recession. Extremely few predicted an event like Covid-19. And even those who could have predicted it couldn’t have predicted how markets would respond. 

Ride the wave, folks.

Spend less than you earn and keep a margin of safety.

Invest your money each month into assets like a stock market index fund.

Ignore the scary news and the noise.

Enjoy your life.

Tell your friends and family often that you love and appreciate them. You don’t know when it will be too late.

Note: This article is for general informational and educational purposes only. It is not individualized investment, tax, or legal advice and should not be relied upon as a recommendation to buy or sell any security. The information is based on sources believed to be reliable as of the publication date, but its accuracy and completeness are not guaranteed.