Updated: March 7, 2023
I’ve been investing since the early 2000s and I’ve experienced how volatile the market can be. One of the worst downtrends I’ve seen happened in 2007-2008, during the US Subprime Mortgage Crisis.
Moreover, the past decade hasn’t been that great at all, with the Philippine Index moving like a rollercoaster, and then going sideways in recent years. Plus, as of writing, global indices, including the PSEI, are massively down.
Many have asked me for advice on what they should do with their investments. And today, I’m telling you my general investing strategy when markets are on a downtrend, and there are no clear signs of when it will reverse.
The Importance of Financial Goals
It is during these times that one realizes the importance of having SMART financial goals. Particularly, having a target amount and knowing when you’ll need to get the money from your investments.
I could never say it often enough — you need to have a goal before you invest. Because without a goal, you’ll never be able to come up with a good investment strategy, much less choose the best investment for you.
Thus, when markets are on a downtrend, the first thing I look at is my financial goals. And to make it simple enough today, let’s just put them into three groups — short-term, medium-term, and long-term goals.
LONG-TERM GOALS
These are the financial goals that I want to achieve 5 years or more from today. More often than not, I’m doing cost averaging to build the future value of my long-term investments.
Cost averaging is a passive investing strategy, which means I just continue investing on schedule, regardless if the market is down or up.
MEDIUM-TERM GOALS
These are financial goals that I plan to achieve within 3 to 5 years from today. Most likely, the money is in a moderate-risk investment.
In this case, it’s now important to consider what’s causing the downtrend. More specifically, I’d have to determine what’s the most likely scenario for the next 3 years.
If the cause of the falling prices can be resolved within a year, then I won’t change anything and just continue with my investing strategy.
However, if the downtrend would most like continue for more than a year, and the immediate outlook is bad. Then, I’d most likely wait for the next price rally to sell and redeem my investment.
After cashing out my investments, I’ll probably just hold on to the money in a savings account, or put it in a low-risk investment.
Lastly, because my money is no longer growing at a rate that I expected, I’ll then evaluate my financial goal. I’d try to determine how much additional cash I’d need to earn to eventually reach my target amount.
SHORT-TERM GOALS
These are financial goals that are happening within 2 years or less. My money would definitely be in a low-risk investment like a time-deposit or money-market fund for these goals.
It’s rare for these low-risk investments to be significantly affected by economic downtrends. For the most part, you’ll just see them growing less or simply going sideways.
In this case, I don’t really touch my money here. I just let it sit and wait for the time to redeem and use it for my financial goal.
My Investing Strategy in a Downtrend Market
To summarize, I normally just stay on course with my investing strategy for my long-term goals.
Then, I make sure that the money for my short-term goals are in a near-cash or low-risk investment.
Furthermore, I keep myself updated on what’s happening, so I can determine what I should do with my medium-term investments. If I should redeem it when prices temporarily go up, or just hold and ride through the volatility.
Above all these, I also put the effort into finding opportunities. I look for ways to earn extra money, possibly create a new source of income, because I might need additional cashflow if the downtrend continues for more than a year or two.
Lastly, I always remind myself that what happens in the global economy is beyond my control. And it’s the same for the local economy, there’s nothing much I can do if it chooses to go down.
But I will always have control over my personal economy. I can be proactive and minimize my spending and create additional income. And I know that doing so will greatly help me in surviving any global or national financial crisis.
Further Reading: Global Markets are Down: What Can You Do
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My approach is a little different but yes, I do keep short, medium and long term goals in mind. I am always on the hunt for undervalued assets that should, over time appreciate. I look for a stock or ETF that has plenty of daily trading volume and also offers options. The underlying MUST have good volume or it’s options will have low volume and very wide spreads, not a good thing for me. My plan is to always buy on the cheap and cash flow the underlying by selling option contracts in the short term. Any dividends received ar gravy on top! In fact, a well supported (by free cash flow) dividend will also help support the stock.
True story about the 2008-2009 meltdown. I was still on my farm and in the US at the time. I actually watched at my computer screen as the mighty GE (General Electric) bottomed out around $6 bucks USD/ share. I was hitting the BUY button on a lot positions in those days, loading up on everything I could afford in all of the tax advantaged retirement accounts and my taxable trading account. The last of my retirement account conversions were about to be completed and the last of the insurance money from when my first wife passed away a few years earlier was now in the accounts.
I took positions in GE and PFE (the drug company Pfizer). Both companies had severely slashed their dividends, something we had not seen before. I held these stocks for years as they recovered. I watched the dividends start to grow again. The best part, because both are high volume liquid stocks their options are easy to buy and sell. I was able to cash flow these two stocks by selling call options all the way up until I was settled in here in the Philippines and looking for a home to purchase. I noticed that these two positions were topping out and decided to sell. I was able to pay cash for a nice three bedroom, three CR home with already constructed dirty kitchen, a large carport and all this inside a gated subdivision. Two good trades and patience (time) did it. Please note that GE has been beaten up yet again but this time for very different reasons, all of the companies mistakes and indiscretions have come to light and they deserved the beating they took!
A quote from Warren Buffett that I think is worth remembering: “Be greedy when others are fearful, be fearful when others are greedy.”