How to take advantage of a market downturn
The recent news, or tweets, about tariffs should come as no surprise to investors who have been paying attention since the 2016 election. This is an administration that likes to move the stock market via Twitter. While there’s a case to made here for market manipulation this is not a political rant, but rather a post about how you can benefit from headlines that sink the stock market.
Barring collateral damage in the form of a depressed Chinese economy - the market will come back. The question is how to take advantage of the increasingly lower prices tariffs will create in the stock market. It helps to have a guideline.
1. Know when to Buy
A good rule of thumb is to buy when the investment you are watching is 10%, 20%, or 50% below it’s 52 week high. The lower the better. Buying at a 10% discount yields an 11% gain when the investment recovers, likewise a purchase made at 20% below the investment peak produces a 33% gain, and of course a 50% discount rewards you with a 100% gain or what’s commonly known as doubling your money.
2. Know how much to Invest
I like to keep this pretty simple. If I’m buying at a 10% discount, I’ll invest 10% of my portfolio. I follow the same rule when buying at 20% and 50% below the investment's 52 week high.
3. Know what to Buy
If you want to keep things simple, then consider investing in index funds that track the broader stock market. This removes the risk of investing in a company that may not recover when the market recovers. If you’ve done your research and are confident you’ve found a company that will recover with the overall stock market, then buy a stock of your choosing. Or do both. Investors have a tendency to look for all or nothing solutions. There’s no rule stating you can’t invest 50% into a stock and the rest into an index fund. Money gives you options - use them.
It helps to have some money to invest...
This guide only works if you have money to buy when the market goes lower. If you have most of your money in a traditional portfolio before a significant decline - you won't have much money to take advantage of lower prices due to losses in your portfolio.
Of course you could pull money from the funds you have allocated to the bond portion of your portfolio, but it's not uncommon for bond funds to also lose money during stock market declines.
This means that the best times to invest in the stock market come when most investors have the least amount of money to invest due to losses suffered in a traditional portfolio.
This is where having an investment portfolio set up like the Smart Portfolio at Wilson Wealth can help. Our Smart Portfolio allows investors to be fully exposed to the market while also keeping plenty of cash on hand to invest when lower stock prices emerge.
If you find that you aren’t positioned properly to take advantage of lower prices in the next stock market downturn contact us for help. You can email us at email@example.com and put "Smart Portfolio" in the subject line or visit us at www.wilsonwealth.com.
Note: This article is intended for educational purposes only and is not to be construed as investment advice. Consult with your financial advisor before making an investment based on this article. If you don't have a financial advisor contact Wilson Wealth Management Group, LLC.