Military Finance Report: September 2015

Tuesday, September 1, 2015

4 Steps to Make Money when the Stock Market Crashes

The DOW Jones has fallen to around 16,000 after hitting a high of 18,300 on May 2015; a 13% drop. Depending on what you’re invested in, you may have seen a large drop in your TSP, 401(k), or your taxable brokerage account. If you’re under 55, you should see this as an opportunity. If you’re over 55 and you’ve seen a 13% or more drop in your portfolio, then you’re not correctly investing your money in the first place. For those under 55, stock market drops can be a good thing to take advantage of. Here’s how:
  • Put more money in as the stock market drops. Most people have their retirement savings on autopilot. TSP and 401(k) contributions are automatically taken out of our paychecks. Some people also have IRAs and a taxable account as well. As the stock market is dropping, you should increase the money you’re putting in your TSP or 401(k). For military members, you can go to MyPay and change the amount anytime you want. For civilians, you’ll have to use your online retirement system or go through HR. Remember, you can only put $17,500 a year in a retirement account.
o    As the stock market drops, you’re able to buy more at the lower prices. Think about it like a sale on stocks or a military discount. You can buy your favorite stock at a 10% discount when the market falls.
  • Find high-paying dividend stocks. In Jim Cramer’s book, “Getting Back to Even,” he calls stocks that pay high dividends because their stock price fell, accidental high-yielders. When World Wrestling Entertainment’s (WWE) stock dropped, its dividend rose to 4% and I bought it. There are many dividend-paying stocks whose dividends rise because of the overall stock market dropping.
o    This mainly applies to people choosing their own stocks or mutual funds. You can use any stock screen to find these. I like Yahoo! Finance and Fidelity’s stock screeners. I search for stocks that have fallen with a 3% or higher dividend yield.
  • Avoid selling stocks. Over the long term, people who sell stocks automatically after a certain % drop tend to lose money. If you’re buying individual stocks, then you should only buy and sell based on a company’s fundamentals and not stock movement. 99% of the DIY investors Buy High and Sell Low because they are too emotional. When Tesla (TSLA) hit $290, a friend got excited and recommended it to people because he wanted to be a part of the stock’s rising price. Unfortunately, the stock lost steam and, at one-point, fell back down to $180; yet my friend was no longer promoting the stock at the discounted price.
o    If you know you’re emotional then avoid buying and selling individual stocks and mutual funds. You’ll lose money over the long run.
  • Don’t time the market. People often wait on the sidelines for the perfect moment in the market drop. They’re so scared of investing at the wrong time that they miss an opportunity all together. This is the major reason why after nearly two decades of DIY investing that I’m not a billionaire; because I’ve incorrectly timed the market. I’ve bought on the way down (low) and sold on the way up (high). Don’t worry about trying to find the perfect time to buy. If your portfolio is less than $1M, then minor changes in your returns/losses will be less than missing out on opportunities all together.
Buying low and selling high seems like such an easy system but when the stock market declines or increases rapidly, people often do the opposite. This psychological response is why gambling is so profitable for the “bank” and so disastrous for gamblers.