Since last week, we saw the S&P 500 drop by 7.5% from top to bottom. This caused a lot of panics from what I saw in the news. Weirdly, I am in the few that was pleasantly surprised. Let me explain why.
Part of my investing strategy relies on two golden rules that do all the magic:
Rule 1: Always invest for the long-term
This is one of the fundamentals of investing. When I say long-term, I mean 20-30 years from now. Simply by knowing that, I expect the market to correct itself or crash a couple of times during my life. I never know when it could happen, and we have no control over that. That is why you got to prepare intelligently by diversifying to avoid losing it all. I know it is easy to start panicking when you see your hard-earned money invested and going down, but remember, you won’t lose anything if you don’t sell. Simply keep it cool, ride the market wave and relax, you will thank yourself for not having sold everything at the bottom when it bounced back as it did for every single major crash in our history. I know this doesn’t explain why the correction from last week is great for me. Let me show you the rule number 2 and you will understand.
Rule 2: Pay yourself first
This is the core of my investing strategy. It involves a lot of discipline to apply properly, but it will be all worth it later. Paying yourself first is basically to commit yourself to invest the same percentage of your income at the same interval of time. That percentage is taken from your income before anything else, even taxes. Just think of it as a tax you force yourself to pay for the future, and you pay it to no-one else than you. Remember that it is a percentage of your income. This means, if your income goes up, you put up more towards investing. By doing this over a long period of time, I will benefit from the magic of compounding (the secret sauce of investing). It is also important to note that you should decide the percentage as it would be money you could afford to live without for a long time. Don’t invest money you need to live.
In my case, I am doing this every month as part of my strategy. No matter the state of the market. By using this strategy over the long-term, whenever the market goes down, I can buy more assets at a cheaper price every month that I invest. The sooner it crashes, the more the compounding will pay because the re-invested interests/dividends will be able to buy more assets.
No matter where the market is going, it’s a win-win scenario for my strategy. If it goes down, it means I can buy for cheap, if it goes up, I can rebalance my portfolio to secure the gains that the market offers me before the next correction or crash, or as I call it, the wall street Black Friday.
If you want to know more about how rebalancing works, check out my other post, I’ve explained how the mechanics work:
Stay cool, relax and enjoy!