Good, Bad and Great Investors
Fred is a Bad Investor. Fred saw the market drop 20% in just a few weeks and decided he would sell some of what he had left. In his mind, he would jump back in once the market "stabilized". Well the market kept falling, and fast!. Fred began to argue with his spouse about what to do next. After a few more big daily drops and associated sleepless nights, Fred sold the rest of what he had invested in equites. He was determined that after news that a vaccine had been found, he would jump right back in, and ride that wave to prosperity. There is still no vaccine, unemployment is at or near all-time highs and GDP forecasts for the next year are dismal. While Fred was waiting for the "right moment" to get back into the market, he sat on the sidelines for the entire 40% stock market rally. Fred is a Bad Investor.
Now what would a Great Investor do? Cheryl is a Great investor, she is financially secure, has a stable high paying job in health care, and no current debt. Cheryl experienced the exact same 20% stock market drop that Fred did, and her portfolio dropped 20% just like Fred’s. However, a Great Investor always has some spare cash on hand, (not necessarily additional funds outside of her investment savings, but from holding back 5% to 10% of her portfolio in cash to take advantage of Bear Markets), and so Cheryl began to add to her all-equity portfolio. Cheryl did not know when a vaccine would be found, if ever, but Cheryl knew that pandemics eventually end, and that if she was willing to lock her money away for at least 10 years, the ETFs and stocks she was now buying at 20% off would most likely end up being much higher in 10 years. Then the stock market dropped another 15%. Cheryl had used her spare cash already, but given her financially secure status and stable job, when the market hit its current low on March 23rd 2020, Cheryl borrowed on her secured line of credit and bought some more equity ETFs. A short few months later, in June 2020, with the stock market up about 40%, Cheryl sold enough of her ETFS and stocks to pay off her line of credit. Her portfolio is larger today than it was on Feb 20th 2020.
Now I am NOT suggesting for ONE MINUTE that a Good Investor has to OR should, borrow money to invest in the stock market. I was simply Illustrating what a Great Investor does.
Sooooo, what does a Good Investor do:
All a Good Investor has to do is .... well nothing
All a Good Investor has to do is ensure that the money they invest in equities can remain untouched for a minimum of 10 years, and preferably longer. This behaviour ensures that when a Bear Market strikes, and the stock market drops 20% to 50%, a Good Investor will never feel pressured to sell into a downturn, as Fred did, and importantly, this behaviour also permits sufficient time for stock markets to recover. To be a successful investor, you do not have to be a Great Investor like Cheryl, you just CANNOT ALLOW yourself to be a Bad Investor like Fred.
The only thing that I can guarantee is that a long-term investor will experience at least one and more likely several Bear Markets. BEAR MARKETS, WHEN THEY STRIKE, AND THEY ALWAYS STRIKE, SHOULD SURPRISE NO ONE! There will always be Bear Markets, we just don’t know when.