It’s been over two years now since I wrote my last post. To say a lot has happened in the world would be an understatement.
Let’s imagine that we went back to February 1st, 2020, and a magic genie gave you foresight into what was about to take place. They told you:
- A global pandemic was going to sweep the earth.
- Millions of people would die.
- Schools, offices, gyms, and churches would all close.
- The global economy would shut down.
- The virus would mutate and have impacts that would last more than 18 months.
- Supply chains would be disrupted.
- Inflation would rise to levels not seen for decades.
- The US unemployment rate would skyrocket to 14.8% – the highest level seen since the Great Depression!
- Insurrectionists would storm the United States Capitol.
- The Taliban would regain control of Afghanistan.
- The US national debt would continue to balloon to nearly $30T.
If you knew all of this ahead of time, what would you have predicted would happen to the stock market?
A big, long stock market crash??
The world is falling apart, for crying out loud. We’re sure to enter another recession. Investments will plummet, right?
Well…. not really.
Let’s look at the chart of the S&P 500 over the past five years. As a reminder, these are the 500 biggest and best public companies in the United States.
Woah, the stock market is up 36% since February 1, 2020!?!
So, what is going on here? Well to start, US businesses are actually doing very well and are making more money than they every have in history. Company profits are at all-time highs despite all the aforementioned craziness.
The Federal Government and the Federal Reserve have provided all kinds of support for the economy. Stimulus put money into the hands of consumers itching to spend it on online purchases, home improvement projects, and post-pandemic vacations. In short, the powers that be flooded the economy with money to keep us from careening off a cliff and entering another depression.
This resulted in tons of extra money going into any kind of investable assets. And when there are more buyers than sellers, prices go up!
Stock and bond prices are at record highs. The crypto market has skyrocketed into a multi-trillion-dollar asset class. Don’t forget that home prices are also at record highs (but I think most are already aware of that)!
As we consider what has occurred, here are a few takeaways that I’d like to leave you with. These should be useful no matter what crazy things (are bound to) happen in the future.
To succeed financially, you need to own assets.
This is one of the most important points I could stress in all of personal finance. It’s the key to capitalism. Good assets like a business, the US stock market, or real estate usually go up over time and produce returns for their owners.
If you ever want to retire and stop trading your time for money (a job), owning assets is the best way to produce passive income. Sadly, gone are the days of companies offering nice pensions to retire on.
Also, owning assets is the single best way to hedge against future inflation. When inflation rises like it has in the past year, asset prices usually rise as well. If prices are rising from inflation, that usually means real estate prices are too. It also means companies are probably making more money, which in turn translates into higher stock prices. Think about it this way: Coca Cola used to sell an individual soda for 5c. Now they sell it for $1 or $2. If you own Coca-Cola stock, you benefited from the company making more money due to the rise in consumer prices over time (inflation).
To combat inflation, you might get a cost of living salary raise of 2-3% per year with your job, or you might not. I recommend you take things into your own hands and go buy assets. This will help guarantee you can keep up with inflation and rising prices.
It pays to not panic sell your investments.
The stock market in March of 2020 did fall. It dropped steeply and rapidly, resulting in a nearly 35% decline. Stocks were falling 10% a day! It was truly a scary time. No one had any idea what was going to happen, but one thing seemed certain: things were going to get extremely bad.
But, lo and behold, the proverbial clouds parted the sun appeared. The markets quickly recognized that this too would pass, and stock prices bounced back. The US stock market is now worth more than double what it would have been if you would have panicked and sold during the crash. And that growth only took a year.
When the world is in chaos, buy all the investments you can afford.
As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful”.
It’s so hard to do, but it would have worked once again. You could have bought investments at bargain bin prices back in March 2020, but you would have needed some serious fortitude.
My largest and primary investment is a Total US Stock Market index fund (ticker: VTI). It owns 3600+ companies. I have peace of mind knowing that the entire US economy isn’t going to collapse permanently or go bankrupt, so it’s easier for me to buy as prices are plummeting. (If I were instead buying individual stocks during a panic, I would be pretty fearful they could be going bankrupt). This diversification is a huge benefit of investing in a stock market index fun.
The future is uncertain and unpredictable.
Markets were booming in 2019 and no one knew what kind of catalyst would cause our next market crash or recession. Extremely few predicted an event like Covid-19. Even those who did couldn’t have predicted how markets would respond.
So, ride the wave, folks. Set yourself up to win.
Spend less than you earn and keep a margin of safety.
Invest your money each month into assets like a stock market index fund.
Ignore all the scary news and the noise.
Enjoy your life.
Tell your friends and family often that you love and appreciate them — you don’t know when it will be too late.