Investing 101 - How to Invest During A Crash

there will always be ups and downs in the markets no matter which market you're looking at what time period you're talking about or what investing strategy you're using there will always be some fluctuations particularly over the short term and it's often those short-term and temporary fluctuations that lead us to make some of our biggest mistakes as investors for example we may fall victim to the behavior gap and underperform the returns of our own investments as a result of us temporarily selling out of some of those investments during a drop we may attempt to time the market during those volatile times or just in general and wind up missing out on a handful of great days over the course of our investing careers that equate to huge losses in our overall growth in the long run we may even get scared away from the idea of investing in certain assets or even all assets in the first place due to this volatility and as a result miss out on all of the potential growth we could have experienced from investing in them in some extreme cases these missteps whether they result from something that's our fault or not can mean the difference between a retirement nest egg worth a few million dollars and one that isn't enough to support our lifestyles when we decide to call it quits so it makes sense that we should spend some time trying to figure out how to make sure we limit those tough times as much as possible in order to protect ourselves from ourselves and those outside influences that could make things more difficult and they have to be with that in mind today we're going to be discussing some strategies that have managed to handle themselves far better than their contemporaries during hard times and some others that have not we'll be going over what traits make the successful strategies so much more successful as well as putting some actual numbers to it to show just how big of a difference these strategies have made during several of the largest crashes in history this is how to invest in a crisis but before we get going be sure to like this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week and if you want to further support this channel you can check out some of the links I've left in the description below which includes a link to the investing platform m1 finance get started investing for free today so the first thing that probably comes to mind when thinking about how to invest for a crisis is to actually not invest at all instead you could hoard cash because as they say cash is king and we've definitely seen the value of some of it on hand during this most recent downturn it allows you to not worry quite as much about how to put food on the table or keep a roof over your head in the short term you also don't have to start piling up high interest debt or hopefully debt period which is great because we don't ever want to have compound interest working against us but that's especially true during uncertain times so maybe the answer is to invest in some cash equivalents like money market accounts or Treasury bills that sure won't make you huge returns but also have very little chance of ever losing much money and in some respects this strategy has actually done reasonably well historically but it is not without its flaws let's take a look at the numbers say John had $100 to invest in 1927 he didn't know it yet but the Great Depression was right around the corner he's a bit more of a cautious investor and so he decides to invest his money in Treasury bills and just so I don't have to say it over and over again all video all net worth figures here are as of the beginning of the year and are adjusted for inflation or deflation as the case may be the inflation and deflation is measured by the CPI a year later in 1928 his investment is worth around 105 dollars in 1929 it grows to about a hundred and eleven dollars then began the worst crash in the history of the stock market but looking at John's portfolio you'd never have known it by 1930 his investment was worth around 118 dollars in 1931 132 dollars and in 1932 when the stock market hit bottom John's investment was worth around 150 dollars so in other words John's nest egg grew by an inflation adjusted eight and a half percent per year during the worst crash in the history of America for comparison's sake the Dow fell by nearly 90 percent from its all-time high in 1929 at least from a purely price drop perspective it would have been slightly less had dividends and inflation but included like we're doing with all the other investments here today so done deal right cash is king it brings with it many stress-related benefits has low risk and it can even outperform other more traditional investments during hard times well not really as I said I'm all for having some cash on hand at all times it's why we have emergency funds after all and I'm also not against tightening our financial belts and finding ways to make our money stretch a little bit further particularly during tough times however while Cash's tranquility during tough times is to be admired it does have a pretty major drawback if you went overboard and kept your entire nest egg invested in it and nothing else and that drawback is that it's not very resilient let's look ahead a few years to see what I mean between 1927 and 1933 the CPI which measures inflation actually fell from around 17 to around 13 it's in the 250 s today in other words the country experienced deflation over that period of time and cash was worth more tomorrow than it would have been today obviously more often than not we see it working the other way around with money today being worth more than the same amount of money tomorrow and in 1934 things got back to normal in that respect when the CPI finally began to slowly creep back up it reached 14 in 1937 15 in 1942 and set a new high of nearly 18 by 1945 unfortunately John's cash based investments couldn't keep up with this rise in inflation and as a result his real net worth took quite a beating over those several years from its 1933 all-time high of a hundred and seventy two dollars it fell to a hundred and twenty eight in 1945 but it didn't stop there John's nest egg continued to lose more and more of its buying power until 1952 when it bottomed out at 91 dollars or around 47% off of its all-time high so in other words 24 years after John initially bought his investment in 1927 he's actually lost some money after adjusting for inflation and here's where the lack of resiliency for cash comes in John's net worth would not actually break that record setting 172 dollar mark until 1999 when it would have been worth an inflation-adjusted one hundred and seventy five dollars as of 2020 his nest egg would be worth around 164 dollars after setting an all-time high of 188 in 2009 now looking back at it we notice a couple of things first going through crashes like the Great Depression and the Great Recession didn't really hurt this investment as a matter of fact it was often setting all-time highs around those times which is awesome but second whenever something did come along to disrupt this investments upward momentum namely higher than average levels inflation it took forever for it to recover it was so bad that by 2020 John's inflation adjusted return over the course of those 93 years would have been about 0.5% per year which is not good to say the least but thankfully not all investments are created equal for those who saw my video on the most important investing decision will ever make you'll know that there are many ways to measure an investment the factors that I discussed in that particular video where the investments return its dependability or trustworthiness its consistency its tranquillity and its resilience its return is obviously measured by its compounded annual growth rate its dependability or trustworthiness is measured by its start date sensitivity in other words say stocks have an 8% average annualized rate of return how far does the actual growth of that investment deviate from what that 8% average would suggest if you had started investing at different times obviously investing in the stock market for say 10 years starting in 1929 would have produced lower than average growth than investing for 10 years starting in 2010 the larger the difference is between your typical average growth and the average implied long term growth the less dependable the investment is consistency is similar in many ways to dependability but it's more focused on single year returns the more closely clustered together the individual returns are the more consistent the investment is so compared to something like the stock market cash is a pretty consistent option tranquility as we just saw is an investments ability to perform reasonably well or at least limit the downsides even during those tough times in other words its maximum percentage drop from the all-time highs to the bottom of the market are pretty low cash as we saw is also a pretty tranquil investment were not for inflation it would actually almost never lose money and finally resilience as we just covered is an investments ability to recover quickly from any downturns that it does experience cash obviously lacks this quality stocks on the other hands do not sure they may crash a lot lot harder than cash but they are capable of roaring back from that crash much quicker let's look at the numbers so assuming John invested the same $100 in 1927 but put it into the overall stock market instead the numbers would have looked something like this by 1928 John's real net worth would have jumped to around 135 dollars in 1929 before the start of the crash he would have had around $190 in 1930 that number would have fallen to 168 bucks in 1931 130 and in 1932 it would bottom out at around 80 dollars that's about a 58 percent inflation adjusted drop from John's all-time high which is worse than anything the cash investment ever experienced but the all stock investment would managed to recover much quicker than the all-cash investment did in fact by 1937 John's real net worth would be around two hundred and thirty-four dollars more volatility would follow as the next several years saw the stock market still struggling to recover from the Great Depression by 1945 John's investment was worth around 240 dollars and in 1952 when the all cash portfolio finally bottomed doubt at about 91 bucks John's all stock investment had grown to 418 dollars after adjusting for inflation it would continue to grow throughout the 50s almost tripling in value by the end of that decade now a couple of things I noticed here was that while the all stock strategy experienced much more turbulence during the Great Depression I mean with the exception of 1937 it was valued at at least a little bit less than its all-time high every year from 1930 to 1944 but it never really went nearly as long without setting a new record high as the all-cash strategy did there were the two seven-year stretches during the Great Depression a ten-year stretch from 1974 to 1983 largely due to the CPI more than doubling in that time period and a 13-year stretch from 2001 to 2013 but nothing worse than that and because it managed to set new record highs more frequently John's ending net worth at least as of the beginning of 2020 was much much higher that original $100 investment grew to an astounding inflation adjusted fifty thousand two hundred and seventy five dollars by the start of the new decade that's a near seven percent annualized average rate of return for 93 years running despite multiple major market crashes and multiple spurts of high inflation but of course this video isn't about the long-term value of stock market investments the goal today is to find a way to invest for so how can we find a way to combine the relative tranquility of the all-cash investment with the resiliency of the all-stock strategy in order to lessen the severity of the downturns that we do experience and enable us to escape from those downturns quicker because that's ultimately the answer we're looking for and we'll find it in altering our asset allocations so you no doubt notice that when the stock market was falling like crazy during the start of the Great Depression in the early 1930s cash was doing ok as a matter of fact it was earning a cool 8% per year after inflation at that time what you also probably noticed is that when the all-cash strategy was bottomed out in the early 1950s stocks were experiencing quite possibly their best decade since before the Great Depression this is no coincidence some assets simply do better than others during certain situations and market conditions the stock market drama-queen that it is does not do well in times of uncertainty or fear we've seen it time and time again especially recently but over the long term the returns have been pretty good and all cash strategy doesn't do very well in times of high inflation we saw that in the late 40s and into the early 50s and we'd have also seen it in the 1970's and early 1980s and by itself the long-term returns are not so great but if we were to combine the two of them we could get a comparatively more tranquil investing experience while still being able to recover from any downturns we do experience quicker than either of the other strategies let's look at how this works say that John split his $100 between the stock market and his Treasury bills in 1927 we'll have him put 75 dollars in the stock market in the other 25 in the Treasury bills in 1929 his investment would be worth around 168 dollars it would fall to one hundred and fifty six dollars in nineteen thirty one hundred and thirty-four dollars in 1931 and bottomed out right around one hundred and one dollars in 1932 that's about a 40% drop from its previous all-time high which is lower than we experienced from the all stock strategy during this time what's more this blended strategy managed to set a new all-time record high of 193 dollars in 1936 a full year sooner than the all stock strategy in 1937 when the all stock strategy were covered to a value of 234 dollars this blended portfolio sets above it at around two hundred and thirty seven dollars in 1945 it had finally fallen back below the all-stock strategy with a value of two hundred and thirty six dollars but was still doing considerably better than the all-cash strategy during this period of higher inflation by 1952 john's new net worth would have been around three hundred and thirty seven dollars again that's less than an all-stock strategy in this case but considerably more than an all cash one and it managed to do it with less volatility and quicker recoveries for instance it recovered from the dot-com bubble in seven years and the housing crisis in for though it did still take a full ten years to recover from the market crashes and high inflation of the 1970s and early 1980s but the idea of mixing various investments that behaved differently under various conditions to insulate yourself from market crashes gets actually even cooler when you begin adding in more investments for instance what if instead of splitting our money between just stocks and cash we added in something else like gold inflation particularly at the levels we experienced in the 1970s and 80s seems to be a bit of a thorn in the side to the previous portfolios and gold has historically been viewed by many as a way to hedge against inflation this time we'll have John put half of his money towards stocks one-sixth of it towards cash and the rest toward gold and when John does this we noticed that the crash metrics look noticeably better he escapes from the Great Depression in four years only experiencing a 23% drop off his all-time high as when the investments bottomed out in 1932 the drops of the late 1970s and 1980s were extremely minimized all the way down to two years and a max drop of 11% down from the 10 years and 40 to 50 percent drops we were seeing with other strategies and believe it or not the 2000s were actually much better handled as well John would have recovered from the dot-com bubble in four years after experiencing nothing more than a 16% drop off his all-time highs and he'd have recovered from the Great Recession in a mere two years after experiencing no more than a 17 percent drop off his highs comparing that to the volatility of an all stock portfolio or even the slower burn of the all cash strategy and the differences are night and day sure the all stock portfolio does end up with a higher net worth by 2020 but that may be alright for especially those who aren't going to be investing for quite as long either because they're retiring soon or retiring early 93 years is a lot longer than most of us will be invested and the difference between a five and seven percent return is not nearly as jarring over ten years as it is over a lifetime so there you have it that's how to invest for a crisis the key is in finding a mix of investments that you can be comfortable with that when combined give you a good amount of tranquillity and resilience though not everyone is going to be investing primarily for the purposes of minimizing their volatility and with that in mind I'm going to be starting a new series on this channel going over the pros and cons of various investing strategies I've gotten a lot of requests over the years to talk about things like Ray Dalio Zahl weather portfolio and the permanent portfolio among others so that's what we're going to do if that interests you be sure to subscribe and hit that Bell icon so you'll be notified when those videos come up but in the meantime if you're interested in learning more about the stock market and its crashes you can check out my video on the history of stock market crashes which should be appearing on your screen in just a second or you can take a look at my stock market and investing playlists for more investing videos just like this one but that'll do it for me today once again if you enjoyed this video be sure to smash that like button if you haven't already subscribe and hit that bell next my name's you'll be notified of all my future uploads I generally upload every single Monday and if you have a friend that would be interested in this kind of content be sure to share it with them let's really get this information out there and start our own financial revolution

Channel: Next Level Life

Views: 27,415

Keywords: financial education, money, next level life, personal finance, investing, debt, financial freedom, financial independence, budgeting, retirement, early retirement, retire early, ryan scribner, financial diet, finance, stock market, stocks, graham stephan, beat the bush, beatthebush, minority mindset, how to invest during a crash, how to invest during a stock market crash, how to invest during a downturn, investing during a crash, investing 101

Id: psgIEOwV564

Length: 17min 3sec (1023 seconds)

Published: Mon Aug 31 2020