Investing During Market Downturn

How to Time the Market? One option would be to use a time machine. In case you don’t have access to it and still want to invest during market downturns, read on!

Intro

When I started investing in the stock market expert analysts were predicting each day that it will crash tomorrow πŸ™‚ Nowadays, I understand that they do this all the time and mostly ignore such noise. I strongly believe that one should always stay invested and not try to time the market.

β€œFar more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”­ – Peter Lynch

Nevertheless, I still want to take advantage of corrections and want to be prepared by having some liquidity when there is increased turbulence in markets caused by trade wars, investor sentiment, economical changes, all-time highs… you name it. There are also some other recession indicators that can pop up, such as “inverted yield curve” – the one that we are seeing these days.

source: https://fred.stlouisfed.org/graph/?g=kABW

For those of you who are not familiar with this “phenomenon”:
The blue curve on this graph represents the difference/spread between yields of US Government bonds with different maturities. In the example above it is 10-year and 1-year bonds.

Normally this difference should be positive (above the black horizontal line), which means that the yields of 10-year bonds are higher than the yields of 1-year bonds. The curve has recently crossed the 0-line again (see red circle). The last 7 times when it got negative there were recessions, which are represented by vertical grey shady bars. Will it be able to predict the next recession?

Ideally, we would like to convert our stock portfolio into cash right at the peak before the recession hits, wait till it reaches the bottom, buy again, and repeat.

“Buy when there’s blood in the streets, even if the blood is your own.” – Baron Rothschild.

Unfortunately, it’s not that easy as it sounds. No one knows when the market will crash or when it will reach the bottom/peak and how long will it take. If someone tells you that he/she knows when the market will drop – run away! πŸ™‚

Keeping big amounts of not invested funds and waiting for a market to go down can be dangerous because it can take years and the market can easily go up another 30% before it corrects. Meanwhile, inflation can significantly decrease the buying power of your cash.

I was trying to figure out how could I be prepared and invest more in the stock market during such crash/recession/correction while still staying invested, possibly, using some alternative investment. This alternative asset has to be liquid, preferably low risk, transaction costs should be close to zero, and yields should be comparable to stock market historical returns, let’s say, 8%.

This is how I started to invest on P2P/Crowdfunding platforms.

P2P/Crowdfunding Platforms

Low Risk

Probably, “P2P/Crowdfunding” and “Low Risk” are not really compatible with each other. It would be definitely not accurate to call P2P/Crowdfunding low risk, but at least some of them have some sort of collateral and/or a buyback guarantee. Of course, loan originators and projects can still default and then you don’t have any guarantee that you will get your money back or even some part of investments will be recovered. Moreover, we are yet to see how p2p/crowdfunding performs during recessions.

I even have a theory that P2P/Crowdfunding interests can actually go up during the stock market corrections πŸ™‚ The assumption here is that there a lot of people on these platforms that combine their P2P/Crowdfunding investments with the stock market and rebalance their investments in favor of the stock market when it corrects. But, of course, if a recession hits hard, then there will be also more defaults on platforms.

Transaction costs

With most P2P/Crowdfunding transaction costs are 0, that is adding/withdrawing funds to/from platform costs nothing. This makes it really easy to add/withdraw any amounts often.

Liquidity

Let’s say that stock market crashes. How fast will I be able to release my cash and start buying cheap stocks?

The liquidity on P2P/Crowdfunding platforms is achieved through short term loans and secondary markets. For instance, on Mintos, Twino or Swaper, the loans with buyback guarantee can be sold on a secondary market in a matter of hours. Grupeer is working on adding a secondary market to the platform. Estateguru and Envestio also provide an option for an early exit, but they charge investors a small fee (as of today, EstateGuru – 2%, Envestio – ~5%). You can read more about my p2p/crowdfunding portfolio here.

Yield

The returns on these platforms are around 10-12%, which is quite healthy.

Funds Injection

Now that we know how and where to keep our cash invested, let’s see how to inject these funds into the stock market when it drops.

Before investing in the stock market I usually set a couple of parameters for myself depending on my financial position. Here is an example:

Let’s say I want to invest up to €50 000.

  • Market drops 10% – invest €5 000
  • Market drops 20% – invest additional €15 000
  • Market drops 30% – invest additional €30 000

It requires some discipline and it can be hard to invest your hard-earned €30 000 when the market already dropped 30% and people panic selling every share they own.

At some point, some of them could even start crying that the economics is going to completely collapse and this time everything will drop to 0.
However, usually, such strategy pays off in the long-term – the more it drops the more you buy!

When I say “market drops 10%”, this 10% is relative to all-time highs of some broad index, let’s say the S&P 500. This index measures stock performance of 500 largest by market capitalization companies listed on US stock exchanges.

S&P 500 Top 10 Holdings (source: Yahoo Finance)

Here is the chart of the S&P 500 during the last market correction that happened in December 2018.

S&P 500 (source: Yahoo Finance)

It peaked at the end of September 2018 at approximately 2920 (just 80 points shy from 3000) and it bottomed out at around 2351 on December 24, 2018. This is almost 20% correction. I was planning to inject an additional ~30K if it drops 30%, but it didn’t happen this time. It could also drop 50%, but then I would at least participate in buying stocks with 30% discounts, which is not that bad after all.

Here is the list of securities that I acquired during the December 2018 stock market correction. For each position there is unrealized profit shown in the last column, this is for the period of December 2018 – September 2019. Most are shares of various ETFs that I don’t plan to sell and will definitely add more in the future. Some of them are ETFs that track famous indices: S&P 500, Nasdaq 100, DAX.

There were more stocks of individual companies, but some of them are already sold (next screenshot).

unrealized profit

Below is the screenshot of the realized profit during the period mentioned above.

realized Profit

As you can see, I bought 30 shares of MSFT on December 20 and then added 20 shares more on December 26 – damn, I was so close to December 24, 2018 bottom! πŸ™‚ I sold 25 shares on August 19, 2019, for a total profit of 40.6%. I still have 25 MSFT shares that I plan to sell.

I also unloaded all shares of OHI in 4 separate transactions: 2 in November 2018, 2 in August 2019. Total profit was 19.6%. I have to mention that while I was holding OHI it was also paying dividends 6-8%. I consider rebuying it in case there will be a good entry opportunity.

In February 2019 I bought 20 shares of PSX and then added an additional 30 shares in May 2019 when it dropped even further. All 50 shares were sold on September 4, 2019, as I needed some cash. Total profit: 14.1%.

Buying shares of individual companies during recessions can be risky as not all of them are going to survive and you can end up catching falling knives. I don’t call it investing and do it mostly for fun πŸ™‚

You can read more about my stocks portfolio here.

Conclusion

Thanks for reading! I hope you found this post useful and interesting.

Any comments, suggestions and constructive criticism are greatly welcomed.

Let me know what do you think about this approach of leveraging p2p/crowdfunding platforms for investing in the stock market during corrections.

4 thoughts on “Investing During Market Downturn

  • Thanks, I liked reading this. It is risky and I’d say it’s half passive as you need to be aware of the markets, but still very valuable information. Could you write about how to start with ETFs, where to buy them and how to adjust them in your portfolio so you have it well balanced for most market conditions?

    • You’re welcome! Investing is risky in general. My portfolio is far from being 100% passive, but I plan to make it more passive by increasing ETFs. Passive investing is boring, but this guy is probably right πŸ™‚

      “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros

      In a nutshell, If you are looking for passive and well diversified portfolio I would suggest to invest in ETF tracking some world index. For example, some ETF tracking: https://www.msci.com/acwi

      You can buy ETFs just like any other stocks using bank/broker.

  • Hey man, love reading your content!
    I’d be curious to understand why you picked the securities that you did pick. Which strategy did you employ? Or did you have some of them on your shortlist anyways and were just waiting for a good point in time to purchase them at a “discount”?
    Keep it up,
    Louis

    • Hi Louis!
      I always have a list of securities prepared for such occasions. However, these days I’m trying to minimize stock picking and buy ETFs with low expense ratios, keeping it diversified across US, Europe, Emerging markets.
      Thanks!

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