Do not panic: Even at the worst of times

It is no secret that the market in 2022 has been tough on investors. Record level inflation, rising interest rates, and a Russian invasion have put the markets under stress – even if you have managed to avoid the worst of it, stocks are still as volatile as ever. Investors are worried about the short-term outlook – But here is why you should stay invested for the long-term.

Fears of a recession

It is pretty clear out there; If you take a quick glance at any investor-related channels right now you will be met with comments proclaiming that we are heading into a recession. Some make it seem like the end of days, others are a little more optimistic – but following weeks of constant volatility and a pretty massive drop in the markets, sentiment has turned sour. One of my favorite creators, Joseph Carlson on YouTube, did a pretty great video discussing this topic recently. He begins underlying just how bad it is out there and then goes on to talk about how we as fundamentally short-sighted creatures tend to focus on the negative once things are not going our way. In particular, he names Peter Schiff, a man with a seemingly incredible track record for predicting market crashes and exactly the kind of expert who suddenly gains incredible attention when things are like right now. I would describe him in one word – A Doomsayer.

Peter Schiff is an American stockbroker who made his claim to fame for calling out the 2008 financial crisis.

The expert in question has since November 2021 warned us directly that inflation will lead us to an imminent recession. Surely we should just listen to this guy now when he warns us about the same thing happening again? Well, here is where it gets interesting:

Schiff warned us about the 2008 financial crisis in a time when few others saw it coming – he was ridiculed for it yet stood his ground and was ultimately proven right. His media reel includes interviews with him predicting the crisis as far back as 2007…

And 2006…

And 2005…

And 2002…

Unsurprisingly, that last one is not highlighted in his reel. Nor is his predictions from 2010 and 2013 that we would see another collapse shortly. That might be because since 2002, the S&P500 – which tracks the performance of the largest companies in the US – is up 490% (adjusted for inflation) or because the time between 2010 and 2014 became one of the best periods ever to be in the market. Massive gains – far greater than any losses you would have suffered from of some of those crashes he so rightly predicted – and which you would have missed out on entirely had you only listened to Peter Schiff.

Joseph Carlson does regular videos openly sharing his dividend-focused portfolio, stock picks, and strategy – this video however is from his second channel. I highly recommend his content.

The point with all this is that no one can predict where the market will go in the short term. From my experience, only two things hold true in this regard:

1. Those waiting for a crash will eventually be right.

2. Time in the market beats timing the market

We will recover from even the worst of times

In March 2020, people fled the markets in fear of the Coronavirus pandemic and the impact it would have. Ironically, what followed was the quickest market recovery in history and as I stuck to my long-term strategy I saw people who had sold miss out on incredible returns. That, along with low-interest rates and possibly because people were forced inside, 2020 also became a time with record interest in the stock market. A renewed interest from people around me is also what drove me to start this blog on January 1st the following year. I knew a lot of new investors had entered the market and I wanted to help people catch up with what I have learned over the past 8 years. But just as investing in a company as it hits new all-time highs, beginning your investing journey at its peak of popularity comes with risks. Something that many of the new investors I know have felt in the last few months as the gains they have made over the past two years has been wiped out as the market corrected.

In July 2020 Morningstar published an article on what prior market crashes have taught us. Most notably they shared a chart over what every dollar invested in the S&P500 since its inception would have turned into at the time of publication.

$1 invested in 1870 (That is a long time ago, I know) would have been $19.044 at the 2020 market peak and $18.500 at its low. You could live with that, right?

What this chart so clearly demonstrates is that no matter what crisis we have gone through in the past 150 years, we not just recovered, but have gone far far beyond it. Even from the worst of times – World Wars, The Great Depression, worldwide pandemics – the economy takes off again. And by worst of times, I really mean it. The crash in 1929 which led to the depression was -79% – the worst drop on the chart and manyfold of what we have faced over the last few months. So even as everything may seem doom and gloom right now, as a long-term investor I am not too worried. I obviously do not enjoy taking big losses, but I maintain high conviction that holding long-term is a more effective strategy than expecting to time the market. Even if you are absolutely certain, like so many others on the internet that we have not yet seen the worst of it – The following is a great example of why it is not even worth sitting out this period of turmoil and attempting to jump back in at the right time.

Three years ago a Reddit user going by /u/jerschneid made a post in a subreddit about financial independence which made a big impression on me. I do not know if he was the first to look into this kind of data (likely not) but it was the first time I came across it myself. The post outlines three fictional characters saving $200 a month to invest in the S&P500 for 40 years or $96.000 in total for each.

They each have their own strategy and this is how it plays out:

Tiffany’s Terrible Timing

Being the worst in the world at timing the market, she puts her money into the market at its absolute peak in 1987 – right before Black Monday resulting in an instant 33% crash. But importantly she does not sell out – instead, she keeps saving, only to repeat her mistake for the next three market peaks. Still, she comes out on top 40 years later with the $96.000 savings turned into $663.594.

Brittany Buys at the Bottom

Brittany is some kind of market genius and only invests her savings at the best possible times. She waits till 1990 following a 19% crash in the markets. She then saves her money until the financial crisis and invests everything when the markets are down 56%. Despite her incredible efforts, the difference between her and her unlucky friend is merely 44%. She ends up with $956.838, 40 years later.

Slow and Steady Sarah

Sarah is probably like most other people looking to invest their extra cash. She invests $200 every single month, consistently and at whatever price the market commands. She ends up with $1.386.429 from the original $96.000. Sarah wins.

“The best time to plant a tree was 20 years ago. The second best time is now.”

My advice is always to begin investing as early as you can. Compounding returns beats all.

How do I invest in times like these?

Be glad that you are in the stock market. It pays off. Big time! The best part is that it does not even have to be that difficult. Most people are served well just by investing in index funds and ETFs as demonstrated with our fictitious friends. However, with my own never-ending curiosity and time spent on these topics just because of the passion I have for them, I do not buy into that premise for myself. I want to see greater than average returns – and have so far succeeded. But I have also accepted that means that I may see bigger losses than the overall market in times like these. I am down more than 20% year to date, but even then up over 500% in just the past 5 years. The reality is that my strategy just does not shift. I will continue to invest in what I know best: Technology and digital transformation, innovation, and disruption. It is what makes me excited for the future and therefore I believe in it. I spend hundreds of hours getting to know individual businesses and products, to tell the good from the bad – often just because I am a user or fan of it myself.

My performance over the past 8 years motivates me to stick to individual stock picking.

With that being said, as I have come to build my wealth over time and taken profits, I have become more conservative in some aspects. That is why I in 2020 seeing as some sectors had not yet recovered from the March crash, I decided to create a dividend-focused portfolio with safer and more stable positions. I bought real estate institutions like Federal Realty Trust (FRT) and Realty Income (O) and other rock-solid companies like AbbVie (ABBV) who have proven their resilience over the decades. Companies that are dedicated to raising their dividends even through the worst of times. Now, just a year’s time later they have all recovered. On top of that they have provided me with a nice stream of passive income through their dividends – certainly something I have come to appreciate in times like these.

“Be fearful when others are greedy, and greedy when others are fearful.”

Warren Buffett

But a market correction likewise creates opportunity for investors looking for growth and some of my favorites like Unity (U) and Xiaomi (HK1810) are now more attractive to me than ever – and I plan on buying more shares in these as soon as I am able. There are many quality companies out there right now at a discount – and if you like me are willing to take on the risk of picking individual stocks, times like these are a great starting point for building your position. For inspiration, I will end this whole thing with a few VERY high-quality businesses (in my own humble opinion) that are now on my radar, besides the two I already own and mentioned. Here, in no particular order:

  • Meta (FB) down 40% YTD
  • Adobe (ADBE) down 23% YTD
  • Shopify (SHOP) down 54% YTD
  • Sea (SE) down 45% YTD
  • Netflix (NFLIX) down 38% YTD
  • Tesla (TSLA) down 26% YTD (Note: This one I do own)
  • Starbucks (SBUX) down 23% YTD

Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.

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