Before we start, make sure to check out my last piece! I explain how at the age of 21 I was able to buy my first home using the RRSP Home Buyers Plan. This week, we’re going to be talking about what everyone likes to talk about. The dreaded stock market crash. I’m sure we’ve all met this type of person. Whether it’s predicting the end of the world or predicting the collapse of the economy, they say it every year. They’ve been telling you for the last 8 years that the stock market is going to crash, it has to! It doesn’t matter that they’ve been completely wrong 100% of the time thus far, all that matters is the “I told you so” moment they will have the year that it does happen.
They suddenly forget the fact they were wrong for so long and get tunnel vision on the time that they were right. The fact is, you can’t predict a stock market crash. I see a lot of conversations on the internet and social media about people who are choosing to stay liquid because of this impending doom economists and investors are talking about. Unfortunately, if you’ve been listening to them for the last 8 years, you’ve missed one of the biggest bull markets we have seen in a long time.
The stock market will enter a correction, or even a bear market one day
This is a well-known fact. There will be a time when stocks fall, whether it be a 10% correction or a 25% bear market. But the fact is, none of this matters if you simply invest in solid, profitable, long-lasting companies.
For example, you invest in a blue-chip giant like TD Bank. The doomsday predictors are right in 2018(finally) and the market falls 40% by years end. You’re nervous, you’re anxious, but you’ve done your research. TD Banks earnings haven’t dipped and their dividend is still increasing. What do you have to worry about? If anything, you should be doing anything you can to buy up more shares at their current price.
Have a look at the financial crisis of 2008 and how the big Canadian banks came out of it. A smart investor would have been buying these companies up as fast as they could, while a naive investor would be avoiding the stock market like the plague. If you were one of the smart ones, it wouldn’t have taken you long to recoup all of your money that you invested pre-crash. As for investing during the crash, an investment in TD bank during the crisis of 2008 would have doubled your money within a year. Why? The same reasons listed above.
Investing is a long-term process. Most investors incorrectly view a long-term investment as an investment spanning over the length of 2-3 years. The amount of people I see on Facebook that call themselves “long-term investors” because they plan to hold a stock for a couple years is concerning. The stock market is absolutely unpredictable over this amount of time. But what we do know, is over the long term, and I’m talking 10, 15, even 20 years, the stock market will go up.
Why a stock market crash brings opportunity
During the all-out panic of a stock market sellout, investors and fund managers are selling securities like mad, and they usually are not following any sort of logic while doing so. This naturally drives the price down and often creates a golden buying opportunity. I’m sure you’ve heard probably the most famous Warren Buffet quote of all time:
“Be fearful when others are greedy, and be greedy when others are fearful”
This couldn’t ring truer than in a bear market. Now, I’m not suggesting you go out and start buying every stock you possibly can during a financial crisis because that is absolutely the wrong way to go about it. But, there are some gems out there that are considered “recession-proof”.
Take a look and Proctor and Gamble as an example. During a financial crisis companies like automobile and computer manufacturers may struggle. Why? People simply don’t buy these luxury items in times of distress. But what do people always need? They need toilet paper, razors, and body wash. When the crash of 2008 started, Proctor and Gamble lost nearly half of their value from September 2008 to March of 2009. A hesitant investor may have viewed the price drop as a reflection of a poorly managed company. A savvy investor would have viewed the price of this absolute corporate giant as a golden opportunity.
A short 4 years later, Proctor and Gamble had returned to its original price since it’s value plummeted over 40% in a matter of four months. In fact, an investment in P&G during its decline in early 2009 would have returned you nearly double your money today, and that’s not even including dividends. Imagine seeing those kinds of numbers in the TFSA or RRSP! Now, doubling your investment over a matter of 9 years doesn’t seem like the most optimal result. But this isn’t a baby growth company we are talking about here. This is an established, blue-chip company that has paid investors handily in terms of dividends. Doubling your investment on companies like P&G just doesn’t happen very often.
All in all, don’t worry about a crash, worry about taking opportunities
There will be a lot of sub-par and mediocre growth companies that can simply never recover from an economic crisis. Lack of sales and lack of investor confidence can put these companies out of business. This is why it is absolutely crucial you have some companies in your portfolio that can withstand a few right hooks. And, in times of doubt and rising interest rates, investing in gold has always been the go to solution.
There is no way you can predict a stock market crash, and anyone who says they can is just blowing smoke. There will come a time when it will inevitably happen, and we can base that off historical records. The only thing you can do to reduce your risk of ruin in times like those is to protect your portfolio by investing in companies where the fundamentals are good, and revenue will still be flowing during a crisis.
It is absolutely crucial to monitor cyclical companies like Ford and General Motors, as their revenues are strictly based off a booming economy. Everyone needs toilet paper, not everyone needs a brand new SUV. If you see inventories stacking up, it may be a sign that vehicles aren’t selling and these cyclical companies are on their way down. Of course, automobiles are not the only industry that suffers during an economic crisis, but I will leave you to do the research yourself on others.
Forget about a stock market crash. As a former professional card player, there is a simple motto most follow. Get it in good, and let the rest take care of itself. The same couldn’t be truer in stocks. By investing in solid companies with great fundamentals, you are giving yourself that edge you need to succeed. It may not work every time, but over the long haul, you’ll have more home runs than strike outs.