4 Investing Lessons That Earned me $200k During the Recession
For years now we’ve all read articles telling us how to handle our stock market investments during recessions. We’ve all read the articles talking about how you don’t sell during a recession (No matter how badly your gut is screaming at you do do so). And we’ve all read the advice telling us that we should view crashes as buying opportunities, or chances to get stocks at a discount.
But it’s hard. As we watch our net worth plummet every day we want nothing more than to sell. And forget wanting to buy more stock; we don’t want to invest more money when we’re convinced it will be worth less every day! No matter how much we resist the articles we resist taking the actions when the opportunities arise.
I’m here to tell you that the advice you’ve read is all true. No matter how scary or disappointing stock market returns are during recessions, avoiding selling your investments and instead buying more is absolutely the way to go.
And I know this because I, despite being fairly early in my FIRE journey, made $200k and got 27% closer to my FIRE goal during the Covid recession.
I don’t mean to imply that the year was all lolipops kittens, or that people didn’t experience extreme hardship. Many people suffered terrible tragedies. Nor do I mean to imply that it’s an easy thing to do, as it requires the luck of staying employed and able to continue investing until things return to normal (Full disclosure: I was furloughed at 3/4 time for several months, but was able to avoid dipping into savings or investments the entire time). But I do mean to say that I learned several important lessons during the last 15 months, that I was able to continue pursuing my goals despite the hardships of the year, and that you can learn the lessons to pursue your goals as well.
Here are the four lessons I learned that helped me make $200k during the recession.
Do. Not. Sell.
“Don’t panic.” — The Hitchiker’s Guide to the Galaxy
March 2020 was easily the most dramatic market I’ve ever experienced. The US stock market dropped almost 32% in a month. In. One. Month.
During the plunge I made the mistake of watching every gruesome step. I looked at how the stock market changed each day. I checked my net worth each day.
I helplessly watched as $100,000 of my net worth vanished into thin air.
And I place a lot of importance on my net worth. I’ve always known I wanted to achieve financial independence while young. I’ve always known that I wanted that place of financial security to provide security while pursuing entrepreneurship and living life on my own terms. I care a lot about how much progess I’m making towards those goals.
Instead of gradually getting closer I was suddenly $100,000 farther from my goals.
It was devastating. I felt like I was watching my hard work vanish. I was watching my life goals get pushed further away. And I very much wanted there to be something I could do.
Fortunately, I had prepared for this moment. I had read investing blogs for years, and read any number of people say that you never sell during a crash. They said that the stock market always comes back and ends up worth more than it used to be. I had experienced fall 2018 when the stock market gradually dropped ~20% over three months, when I had that same helpless sinking feeling as I got further from my goals. And I had watched the stock market bounce back up to new record highs, proving them right, a mere 4 months later.
I didn’t panic. I didn’t sell. Because you never sell during a crash.
And the market rewarded me. By August it was back up to where it had been before the crash. Selling would have locked in my $100k of losses. Simply refusing to sell and holding on got my $100k back in a mere 4 months.
And the stock market is now 23% higher than it was before the crash began.
Now the investments I had before the crash are worth nearly $100k more than they were at the start. Instead of losing $100k, I made nearly $100k. All because I didn’t sell.
Lesson #1: Do not sell during a recession. Do not sell during a recession. I can’t stress this enough: Do not sell during a recession. If you need a calming presence, feel free to remember the calming advice of The Hitchiker’s Guide to the Galaxy and “Don’t Panic.”
“Be greedy when others are fearful.” — Warrn Buffet
This is an extension of the first lesson.
The first lesson was all about staying calm, and staying the course, because we know that the market is going to bounce back and it is going to set new record highs. We know that, so we don’t sell when it crashes.
This less takes that a step further. We don’t just not sell during market crashes. We buy.
The math behind why we buy is straightforward. Since the market is down, that means that stocks are cheaper than they used to be. You can get the same percentage of a company, and the same dividend payouts, for a lower price than before the crash.
This is almost literally a sale on money. You can buy your future income for a lower price than before the crash started.
Take March 2020 as an example. On February 14, the peak before the crash, the market was at 3,380. On March 20 it was 2,304. Shares of stock were 32% cheaper in late March than in mid February. Every dividend payout was 32% cheaper. Every dollar of future growth was 32% cheaper.
And in order to get back to the previous highs, which we know they’re going to do eventually, stocks had to rise 47%. I didn’t know how quickly the stock market was going to shoot back to previous highs, but I knew it was going to. I knew that buying during the crash was going to net great gains.
I quickly maxed out my Roth IRA.
I increased my 401k contributions, so I could max out that account quickly before the market shot back up.
Extra savings some months had caused my 3 month security fund to get to more like 6 months. I quickly fixed that situation.
With the pandemic raging, there was nowhere to go. I had to drop my habit of going to comedy clubs which meant no more tickets to shows, no more beers at the show, no more dinner with friends beforehand, and no more driving 25 miles each way. That money ended up in the stock market.
Since I had more time at home and valuable skills, I took on side contracting work.
All that money ended up in the stock market as quickly as I could get it there.
And the stock market helped me out, by quickly shooting back up not just to previous highs but to shockingly high new levels. It’s now up 81% since the bottom. This means that every $1 invested at the bottom has already, in only 15 months, given $0.81 back. If you took aggressive action to throw money into the markets quickly, and invested tens of thousands of dollars as quickly as possible, that invested has already returned tens of thousands of dollars in pure profit.
Lesson #2: When the market crashes, stocks are on discount. Buy, buy, buy. Buy as much as you can. Cut down on luxuries and take on extra work if you can. Get as much money into the market as you can, because it’s going to pay you back handsomely for it.
Buy low, sell high
“Buy low and sell high. It’s pretty simple. The problem is knowing what’s low and what’s high.” — Jim Rogers
This lesson is both something incredibly obvious, and something we need to be careful with.
Obviously we want to buy low and sell high. Obviously.
But it’s not that easy. Identifying the absolute peak of the market is extremely hard to do. And identifying the absolute bottom is equally extremely hard to do.
Using your judgement to try to time the market is a terrible idea, and a great way to ensure your investments perform worse than the market. Don’t do it.
So how do I propose that you buy low and sell high?
I leveraged the fact that I had bonds which didn’t lose value right away.
Bonds typically have two purposes in an investment portfolio. 1) They maintain their value in crashes, providing stability to your acount and helping you not freak out. They help you with lesson #1. 2) Rebalancing your account during a recession, when stocks have dropped but bonds have not, automatically sells bonds and buys stocks. So you’ve just sold bonds high and bought stocks low.
I decided to get more aggressive about it. I created a schedule. If the stock market dropped 10% I sold 33% of my bonds and bought more stock. If the stock market dropped 20% I sold another 33% of my bonds and bought more stock. If the stock market dropped 30% I sold all my bonds and went 100% stock.
Typically I run an 80% stock / 20% bond portfolio. So this means that I adjusted my portfolio is follows:
- Normal: 80% stock / 20% bonds
- Stocks down 10%: 86.7% stock / 13.3% bonds
- Stocks down 20%: 93.3% stock / 6.7% bonds
- Stocks down 30%: 100% stock / 0% bonds
Then, when the stock market returned to what it was before the crash, I sold stock and moved back to 80% stock / 20 % bonds. Mathematically, this forced me to buy stock low and sell it back at higher values. Mathematically it yielded the following results:
- Stocks I purchased when the market was down 10% returned an 11.1% gain before I sold them.
- Stocks I purchased when the market was down 20% returned a 22.2% gain before I sold them.
- And stocks I purchased when the market was down 30% returned 33.3% before I sold them.
All told, given that each of those groups represented 6.7% of my portfolio, I ended up getting a 4.5% return on my portfolio when the market returned to full value. That’s a 4.5% return in the span of four months, beating the market by 4.5% in the period.
If I could get 4.5% every four months, and consistently beat the market by 4.5%, I’d be a happy man.
I may not be able to do it every four months, but I can do it every crash.
Lesson #3: Selling bonds and buying stocks to shift to a more aggressive portfolio as the stock market drops can lock in gains that you can appreciate as the market returns to full value.
Predict Sector Shifts
“Know what you own, and know why you own it.” — Peter Lynch
My fourth lesson is a much more subjective one. But it’s also one that we saw very clearly during this recession.
Not every industry reacts to the situation in the same way. While the market as a whole crashed, tech stocks took off. In hindsight this makes sense as tech stocks were well situated to serve the public through it all. Zoom stock exploded, because suddenly everybody was using Zoom several times a day. Amazon stock exploded because it went from being the most convenient retailer, to being basically the only retailer anybody was able and willing to use.
If I was smarter I would have make a killing off of investing in tech stocks at the start. But, alas, I hadn’t learned this less on yet. Honestly, I learned this lesson from missing that opportunity.
Not all sectors stocks move in lockstep. Just because the market as a whole is down doesn’t mean every industry is getting crushed. And just because the market as a whole is back up doesn’t mean every sector is back up.
Come the fall I started searching for ways to invest that were still at bargain prices. The major indices, and the associated index funds that I usually invest in, were no longer at a discount. Instead, they were actually up to being historically very expensive. So I wanted to find something else.
I found that energy stocks had been especially hard hit by the recession. Russia and OPEC were fighting over oil production which had caused the price of oil to crash. Simultaneouly people had stopped driving, so nobody was buying gas. Oil companies got hit hard.
But there was no way I believed that was going to last forever. OPEC and Russia both want oil prices to be high so they make a profit off of it. I trusted they’d come to an agreement eventually. And people are going to start driving again when the pandemic is over, so the oil companies will have a huge customer base again. That industry got hit very hard, but I believed it was temporary.
On October 19 I made a big move into Vanguard’s Energy ETF. It was too tempting not to. The share price was down 50%, and the dividend payout was up to 6.75%. It looked like a way to buy an index fund with a very high dividend, that I simultaneously expected to shoot back up in the next few years.
As of today it’s up 98%. In 8 months. While paying a great dividend.
As expected, OPEC and the Russians resolved their dispute. Oil prices are back up. We’re, at least in the US, gradually coming out of the pandemic and people are starting to drive again. The near future is looking good for the energy industry. And those who put in the effort to find the sector that got hit hard by temporary problems made a pretty penny off the investment.
I did the same with Vanguard’s Financials ETF. I didn’t have as strong of a reason to believe it was going to do well, but it was at a low P/E ratio and the financial sector historically has done well as the country comes out of a recession.
In the same 8 months it’s up 53%.
Identifying sectors that were especially hard hit during the recession and poised to bounce back served me very well. By understanding what’s happening in the market, and predicting what industries are going to benefit from the return of normalcy, you too can get above average investment returns.
Lesson #4: If you can predict market trends you can get incredible value. Look for sectors that are likely to do very well (Such as the tech boom that I totally missed), or sectors that are hard-hit by temporary problems (Such as the energy sector boom that I got).
Wrapping It Up
Recessions and market crashes are scary. Suddenly we feel less secure in our jobs, and are worried about losing our income. On top of that we’re watching our net worth melt as the market crashes, and worried that we’ll end up having to sell for almost nothing.
But if you can keep calm you can make some excellent moves that turn a market crash into a great wealth making opportunity. You can use these four lessons that I learned during the last recession to come out closer to achieving your financial goals:
- Do. Not. Sell. Stay calm.
- Get Hungry. Buy as much stock as you can.
- Buy Low, Sell High. Follow a strategy guaranteed to boost returns.
- Predict Sector Shifts. Buy the right sectors.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.