Ultimate 7-Step Checklist to Capitalise on a Falling Market

Capitalise on a Falling Market

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Ultimate 7-Step Checklist to Capitalise on a Falling Market

Here is the harsh reality of investing in the stock market…

The stock market will crash! A crash is approx – 30%. And this will happen a few time in your lifetime.

The stock market will then recover all the ground it lost during that crash and move on to post new highs. This will happen every time.

Then, there will be a market correction, i.e. negative 10%, again.

Then, the market will gain new ground again.

Rinse and repeat, rinse and repeat. 

And here is the double whammy. No-one can predict when these things will happen. 

The interconnected systems of our world are just far too complex.

Wow, I’m really selling this! Stick with me, its worth it, this could change your life!

The good news, is that there are steps you can implement to be prepared…

And here it is, the ultimate 7-step checklist to capitalise on a falling market.

Step 1 - Choose the Investment Vehicle

For me this is almost a no brainer, as the research has been done for us in this space.

I’ll cut to the chase for you. A lot of research out in the last 10 years is pointing to low cost Index funds being the best investment option for 99.99999% of investors (the 0.000001% exception are the outliers, e.g. Warren Buffet).

My choice is Vanguard. It is an ultra-low-cost index. The Vanguard Australian Shares Index (ETF) also called the VAS is ultra-low cost. It has a management expense ratio of only 0.03%.

Specifically, I will be investing in a, mix of the Australian market, the US market and the world markets. Probably with a mix something like 80%, 10%, 10%

Vanguard2

Vanguard – One of the largest, most recommended and lowest cost index funds in the world. Capitalise on a Falling Market!

Step 2 - Set up Your Brokerage Platform and Account

A brokerage platform is the tool on your laptop or phone which you use to place the trade. 

The account is where you hold your money for trading and where dividends go and fund are drawn from for your trading activity.

I recommend Self Wealth. It is Australia’s lowest cost trading platform and has won Money Awards in 2018, 2019 and 2020.

Step 3 - Have Cash at Hand Ready to Invest

There are a few options to do this, here are three:

Option 1 - Consider Asset Re-Allocation

When the market is plunging, this is the time to consider re-allocating some assets out of cash, ready to invest into the market.

For example, you could draw down on some savings or you could use money in an offset account or you could use a re-draw facility where you have money available.

Option 1 - Consider Borrowing at a Low Interest Rate

In market conditions where interest rates are really low, you could even borrow money from a peer-to-peer lending platform at say 8% in the hope to make returns of more than that.

Even better than borrowing from a peer-to-peer lending platform you could add to your home loan and borrow cash at 3.0% from your bank, in the hope that you will make more than this on the stock market.

Note the Australian market made has made an approx 13% return on average (before inflation and tax) since 1900.

Option 3 - Invest Your Emergency Fund (consider your Stocks to be the Emergency Fund)

I don’t recommend this option for most people, however, for some, it’s worth considering given that interest rates for banks are at record low prices. 

Essentially your cash is almost being eroded away by inflation all the time being tied up in cash accounts because of the low interest rates.

By intentionally setting aside 75% of your Emergency Fund into a brokerage account, you’re preparing to capitalise on a falling market.

But as I said before, the market always goes up. So, in the long run you will win.

Example:
You have a $20,000 in an Xinja savings account earning 2.25% per year. This is your 3 to 6 months’ emergency fund.

Question:
What will have a more positive return on your life in the long run?

Cash held at 2.25% in a Xinja savings account (and falling), or cash held in a low-cost index fund (with a 0.03% management expense ratio) earning an average of 7.7% returns per year over the long term (quoted from Warren Buffet).

Again, for me, it’s a no-brainer.

I’m already making preparations for our family to restructure our finances so that our most of our emergency fund is moved into stocks in one lump sum.

Step 4 - Watch the Markets

This is easy. 

Download any market app onto your phone and watch the markets daily, even a number of times per day, just so you get used to keeping an eye on the pulse of the market.

Step 4 - You Can't Time the Market

Really the best time to invest is now. If you think you are going to time the bottom perfectly then I’m sorry you are not.

Let me give you the example of the GFC. At the time when it was at the bottom, almost all the experts were predicting it was going to fall another 2/3rds of existing value.

So if you had started with $1.2m before the crash started and you were now down to about $600k, all the experts were predicting you were going to lose another 2/rds, i.e. down to $200k.

But that didn’t happen. 

So, three things to take note here.

  1. Understand and accept that no-one can predict what the market is going to do. So it is best to just get in and enjoy the ride. 
  2. Understand that the intention of Index investing is to never withdraw those funds. These funds make up your freedom fund which will be your pre-superannuation pension. So, take that mental load of your mind knowing that there is no future step, it is, buy and hold, let it grow and then live off the dividend earnings once you reach critical mass. 
  3. Be mentally prepared to ignore the inevitable panic and mass hysteria around the markets. Imagine losing half your money and then all the experts predicting you were going to lose another 2/3rds again. If you pulled out your money then, which many people did, you would have crystallised those losses. Don’t do this, re-frame the situation and see the opportunity to buy at a discount. 
Step 4 - Invest the Lump Sum

Invest the cash you re-allocated as one lump into the low-cost index fund. 

Do this by clicking the “Buy” button on your brokerage platform, e.g. on Self Wealth.

Step 4 - Set up an Automatic Investment Plan

Re-allocate as much money as you can comfortably into your brokerage account on a monthly basis. Do this by setting up s direct debnit from your payroll or from your everyday bank account on pay day, sending the money to your brokerage account. 

Then set a reminder in your calendar for once every month or once per fortnight where you go into the brokerage account and execute a “buy” trade. 

There you have it folks, my Ultimate 7 Step Checklist to Capitalise on a Falling Market.

Be the outlier!

Re-frame the hysteria as an opportunity, embrace the bear, and take action to capitalise on a falling market!

Get there faster.

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The EntreFIneur
The EntreFIneur

EntreFIneur is a passionate frugalist, FI enthusiast, experimenter, ideator and entrepreneur. He's also a family man and when he has time, an active fitness fiend and outdoor hobbyist.

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