Most people know how to make money when the markets are going up. But very few people know how to make money when markets are going down.
Here in 2020, amid COVID-19, there are powerful lessons to be learned from the crash of 2008.
Let us show you how we would have managed your money during the 2008 crash and then the subsequent recovery in the marketplace in 2009/2010.
We are facing a very similar scenario today.
When you go shopping, do you like to purchase items for the full retail price or do you like to purchase items on sale? Most people want the best possible price and will wait for an item to go on sale. So, when the markets fall 20%, 30% or even 40%, why are you running for the door? The markets are on sale!
As Warren Buffet has said in the past, when the markets are going up and people are being greedy, that is when he is most nervous. However, when the markets are going down and people are starting to get nervous or panic, that it is when he plans to be greedy!
Let’s turn the clock back to 2007, prior to the stock market crash of 2008, and let’s assume that you gave us $1,000,000 to invest. We would invest your money into a “Flex Plan.”
For example, we would invest the $1M evenly across Fixed Income, Balanced, Foreign Equity, and Canadian Equity Funds. And so, we would invest $250K into each category, and let’s assume each category was trading at $10/share. Thus we would have a total of 25,000 shares in each category:
|Fixed Income||$250,000||@ $10/share||= 25,500 shares|
|Balanced Fund||$250,000||@ $10/share||= 25,000 shares|
|Foreign Equity||$250,000||@ $10/share||= 25,000 shares|
|Canadian Equity||$250,000||@ $10/share||= 25,000 shares|
So, we would have 100,000 shares @ $10/share for a total of $1,000,000 invested in the marketplace.
It is a truism of the market that when Equities go up, Fixed Income goes down and when Equities go down, Fixed Income goes up. Also, Balanced Funds are made up of both Equities & Fixed Income and in turbulent times (i.e. market corrections), Balanced Funds do what their name implies: they “balance” out.
Let’s fast forward the clock to 2008. What happened during that time frame? The markets crashed and Equities got hit hard. In fact, Canadian Equities lost 50% of their value and Foreign Equity were down 40%…and so the portfolio would look like the following:
|Fixed Income||25,000 shares||@ $12/share||= $300,000|
|Balanced Fund||25,000 shares||@ $10/share||= $250,000|
|Foreign Equity||25,000 shares||@ $6/share||= $150,000|
|Canadian Equity||25,000 shares||@ $5/share||= $125,000|
You would have called us on the telephone and said with great sarcasm, “I gave you $1,000,000 to invest and now it is worth $825,000. You are doing a terrific job!”
Most Financial Planners would tell you, “Don’t worry, the markets will come back” and they are usually correct. So one option is to sit on the sidelines and do nothing and watch our $1,000,000 go down to $825,000, and then eventually back up to $1,000,000 and say, “Wow, I’m glad I didn’t lose any money.” Or we could “Flex” your plan to make even more money. Let us show you what we mean.
Let’s “Flex” your plan:
- We are going to sell off the Fixed Income to buy the Canadian Equities that are on sale. So, we are going to get an additional 60,000 shares in Canadian Equities ($300K/$5). We already had 25,000 shares of Canadian Equities, so in total, we now have 85,000 shares of Canadian Equities.
- We are going to sell off the Balanced Funds to buy the Foreign Equities that are on sale. So, we are going to get an additional 42,000 shares in Foreign Equities ($250K/$6), We already had 25,000 shares of Foreign Equities so in total we now have 67,000 shares of Foreign Equities.
- If we add up the Foreign & Canadian Equities, we now have 152,000 shares.
Let’s fast forward the clock to the end of 2009 and the beginning of 2010, when the markets were already very close to where they were in 2008, prior to the market crash.
If prices have risen such that we only get back to our original $10/share, how much is our portfolio worth in 2009/2010?
152,000 shares x $10/share = $1,520,000
That’s what we call “Flexing.” We’d be happy to share our narrated PowerPoint presentation on this subject, which gives a bit more detail. If you’d like to receive a copy, or learn more, reach out anytime.
John Moakler is a nationally recognized financial planner specializing in financial health care for medical professionals. He rigorously diagnoses your financial condition and then prescribes a customized, written Financial Treatment Plan. If you’re a dentist or doctor and want to learn more – or get started on a plan just for you – contact John today.