Dancing with the markets - Part 2/2

Buying when the dance floor is empty

You are doing well for yourself, observing the dance floor with your buy-and-hold strategy.

But, suddenly someone unexpectedly farts at the center of the dance party!

Everyone leaves in disgust and the music stops. It’s all quiet, a bit chaotic and some people start to leave. What do you do now that there is no dance to observe?... Slowly you gather yourself and as the lone wolf you boldly enter the dance floor.

Everyone is looking at you.

You start dancing on your own in complete silence. Slowly people recognize that the smell is gone, and dancing is safe so they start joining you. The music comes back on. You stay there for a moment, to not spread doubt.

Now elegantly, as more and more people are back on the dance floor, you leave it and go back to observing it while dancing with your friends on the sideline (read; you continue with your buy-and-hold strategy, and buy into the market using the DCA-method explained in the last article).

The above lone-wolf-scenario also known as “buying when there is blood in the streets” or “buying when people are overly pessimistic”. There are a lot of ways to say it and they all mean the same thing; buy when the market is really low and people are losing their cookies because they lost their house and job. Think “financial meltdown in 2008”-situation or “fart on the dance floor”-situation, if you will.

Of course it’s no joke when this happens, and you might not be in the situation to buy or you might see it is a cold thing to do. Fair enough. But from a investment-point-of-view, it's the best thing you can do.

The idea is that you stay with your buy-and-hold strategy, and you take the hit as everyone else. It's simply too hard to know when the market is going to go down. We can't time the market like that, remember?

Where you differ

Is that you don’t panic once it’s at its worst. You instead gather yourself and invest in the general market (not single stocks), while everyone else leaves the dance floor. If you have the guts to put even more money into it at this moment, you are better off in the long term. I will explain how you invest into the "general market" in the next article.

It sounds dead simple, but emotions come into the equation very fast. Just think about it; who dares to enter the dance floor alone, after everyone left, it smells like fart and the music stopped?

The hardest thing we (me and my fiancé) had to do under corona (in terms of investment) was to put ALL our leftover money into our broker account, and press “buy” at the moment when everything was uncertain and the whole world was in panic. It felt wrong, but it played out well, as it always has since the beginning of the financial market as we know it. We still did it with the DCA technique, just a lot more money in less time than usual.

There is a system to it

Fortunately for us these meltdowns or market collapses have a certain system to them. Lars Tvede, a Danish investor and writer, has written a whole book about this. In his most recent book he conveniently compiles it down to the 10-year rule (thank you Lars). Approximately every 10 years, the market goes down more than 25%. Occasionally it’s really bad, which it might be once or twice during 50-60 years.

If we take the S&P500-index (the largest index in the world) as an example:

In 2020 the index went down 32%, in 2008 it went down 56%, 2001 down 47%, 1988 (33%), 1981 (26%), 1973 (48%), 1969 (33%), 1962 (27%), 1946 (26%), 1937 (56%), 1929 (84%).

On average for the S&P500 this is every 9 years, with 7 and 8 years as the most frequent. On average it fell 44% from top to bottom.

With this in mind, you “simply” follow your slightly boring strategy of staying in the market, and once the market falls more than 25% from the top, there should be a little alarm telling you to start buying more. It might go down even further, then you just keep on buying more.

I did this during corona by saying this to myself “okay Martin, normally you invest €500 in the market every month. Now that the market is down, you will somehow find the next 3 years worth of that (€18.000), and invest it over the next 4-5 months”.

I only did this knowing that IT WILL ALWAYS RECOVER. In most cases faster than you think. It felt wrong and it was dead scary.

The last note

The last time the market went down more than 25% from the top was in 2020. So by just following history, this means that the next time it might happen will be somewhere between 2026 and 2032. It might be a bit earlier, it might be a bit later, but it would be very odd if it happened already next year.

This means that if you are just getting into the market, you should have at least 5 good years of investment in front of you. That's not so bad, is it?

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