Do you know the four wealth strategies to weather a market drop? When the market goes red, it can be scary, especially for your trading accounts. Does the thought of a stock market drop leave you sick to your stomach and reaching for the phone to sell off all your shares? If so, do not leave this page; you need to read this. Your future self will thank you for it.
Four Wealth Strategies to Weather a Market Drop
First things first, is it a market drop or is it a crash? If a market falls by at least 10%, it’s a correction or drop. At the same time, a market that falls by at least 20% from its peak is a crash.
Or, in other words, welcome to the bear market, one in which significant losses in paper wealth occur. Panic and fear drive cash. Today, I’m going to explain to you the most crucial fact of all: the most significant danger isn’t a correction or a bear market; it’s selling off all your investments because you’re scared.
Bear flags can really get you down. So if you don’t know the four wealth strategies to weather a market drop, then keep reading.
Fluctuations Are a Good Thing
Yes, you read that correctly, fluctuations are a good thing! Corrections have occurred about once a year since 1900. But the good news is, historically, they only last about 54 days – less than two months!
Let’s take a look at the portfolio of one of the best investing gods of all time, Warren Buffett. Back in the late 1990s, Coca-Cola was ridiculously overpriced, and this was no surprise to anyone.
At the time, Buffett had around a 10% ownership in the company. For those of you who like the shock factor, this translates to roughly $1 billion in Coca-Cola (KO) shares. Yikes.
And as always with anything overpriced, it will fall. And fall it did by 50%; enter the crash of 1987. But did Buffett unload his shares with the crash? No, he held on.
And you want to know why, because crashes are part of life. Warren Buffett knows a thing or two about making money. Maybe even our four wealth strategies to weather a market drop.
Strategy #1: Focus on the Buy and Hold
“Over your investing life, you should be prepared to see the net worth of your overall portfolio fall by 50% on at least four different occasions”.
Warren Buffett, in a 1993 letter to shareholders of Berkshire Hathaway, provided some fascinating insight about the long-term performance of Coca-Cola:
“In 1919, Coke went public at $40 per share, and by the end of 1920, it was down by more than 50%, to $19.50. But by the end of 1993, if you held and reinvested that one single share with dividends, it was worth over $2.1 million”.
Strategy #2: Ignore Volatility
For those of you who don’t know Charlie Munger, he’s Buffett’s right-hand man at Berkshire. One of his famous sayings is that if you can’t handle a 50% drop in price, you shouldn’t be in the market. Take a moment to let that sink in.
The reality is, it’s happened four times since Buffett and Munger took over Berkshire. Heck, it’s even happened to Coca-Cola on at least three occasions since its 1920 IPO. For you, as an investor, this means you’ll see the paper net worth of your holdings fall by 50% at least four times.
Why does this matter? Because it shows you that you should expect corrections, they are a part of life. Furthermore, fewer than one in five corrections become a bear market. To put it another way, 80% of corrections don’t turn into bear markets.
My takeaway from that: if you hold tight, likely, the storm will soon pass.
To put this in perspective, from 2008 to 2009, the stock price of Coca-Cola fell from $32 to $20. On paper, this translated to a decline of around 40%. And this, unfortunately, is what causes people to panic, dump their shares, and destroy years and years of wealth overnight.
So what’s vital for long-term investing is to ignore volatility and focus on the underlying business fundamentals.
Strategy #3: Focus on Business Performance
If you want to become wealthy even through the passage of recessions and depressions, I encourage you to focus on business performance.
Once again, I’m going to use Coca-Cola as an example, even though I like Pepsi better! In 2008 and 2009, Coca-Cola dished out $1.51 and $1.47 in profits per share, respectively.
And you want to know what else happened at that time? Unless you were living under a rock, it was the worst economic catastrophe since the Great Depression.
Despite this, Coca-Cola’s profits only declined by $0.04 per share. What’s more, they raised their dividend from $0.76 annually to $0.82 annually.
Strategy #4: Focus on Dividends
Do you want to know why Warren Buffett doesn’t touch the 400,000,000 shares of Coca-Cola in his portfolio? Two words, profits and dividends – both of which go up each year. With a stable company and brand identity, Coca-Cola is here to stay.
Imagine what your life would be like if you owned a block of shares in a company that paid you every 90 days? What’s not to love?
My point is this: spend your life acquiring shares of companies that pay dividends. That’s how you learn how to invest in the stock market.
Learning What to Do
When you’re in the midst of a bear market, the pessimism is almost palatable among the people around you. The most successful investors take advantage of all that gloom and doom and continue to invest at bargain-basement prices.
Just look at Sir John Templeton, one of the greatest investors of the 20th century. He made a fortune buying cheap stocks amid World War II. In his words, “The best opportunities come in times of maximum pessimism.”
If you’re still wondering what you should do during a market drop, here’s a piece of advice. During that time, find the companies that you know are wonderful. Do your research.
