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Financial Planning Index Funds and Stocks Post

Staying sane when the Stock Market Crash has eaten your savings!

Image result for market crash

Couple of days ago I talked about Surviving Stock Market crash of 2020, the market, oil and bitcoin all are going down south. My portfolio is at -7%, 2.5 years of regular investing has vanished. It could simply go down further but it will not crush my Financial independence dreams.

How can I stay clam when the Stock Market crash has destroyed my savings?

I do not know the answer to this.

It is not easy to see our savings burn up in so quickly. It takes me several months to save up money and its not easy to see it simply burn away.

Prioritize your family’s safety first!

The Stock Market Crash was triggered by the coronavirus, this is a real health threat and we all are at risk.

Safety of your family comes first! If you are in an at-risk industry like travel, music, airports, restaurants or similar, you must first make sure that you have sufficient cash in case of a job loss or sudden medical expense is needed. This could be anywhere between 3-6 months of expenses. A Stock Market Crash often result in companies going down under, and an added threat of coronavirus will only make this harder to recover

Invest, only if you can stomach it and can stay put for a few years!

My favorite Financial independence author JH Collins wrote on his blog about the 1987 market crash and how he reacted to it. It seems to be a great idea to invest all surplus cash into the market, either through stocks or simply buying cheaper index funds.

At the same time, be aware of:

  • We don’t know what is the bottom (and when), so the stocks can continue to fall for next months (average bear markets last 4 to 11 months).
  • Companies will fail and die, so your bets might fall flat!
  • If you think recovery is quick, you might be surprised.

So, one of the ways to safeguard against the wobbly race to the bottom of the stock market crash is to invest in intervals. In case you have 2000$ to invest, instead of going all in a single day, average this out to say 100 $ per week for 20 weeks instead. This is DCA in a nutshell.

Don’t invest if…

  • You want the money back in 12-18 months
  • Your job can be at risk, be very aware
  • You are not comfortable, just don’t listen to an unknown guy’s blog post to do it if you do not believe in it.

Finally, keep calm and carry on. Sell if you feel you cannot recover at all, but before this please read this thread from 2008’s crisis! We aren’t the first ones facing this, and it isn’t the last Stock Market crash we’d see!

Categories
Financial Planning Index Funds and Stocks

Survival guide to the 2020 Stock Market crash

not stonks meme
Not Stonks!

Today after three weeks of volatility, the markets, oil and bitcoin are all in a free fall. An year ago I had talked about the impending recession and the market was going all up! This morning we have the first red signs of the 2020 Stock market crash, some already call today as the Black Monday. Within last 2 weeks, my gains from 33% have come down to 6% this morning, and can go lower.

In 2008/09 I was still studying and was not an investor. If you are like me, then this is the first time for you to go through this. I am penning down three potential approaches which make up this survival guide to the 2020 Stock Market crash.

Tip #1: Book profits now, enter the stock market at lows

This is brilliant advice, follows on the famous Buffet quote,’Buy when market is in fear and sell when its greedy.’ The only challenge is, when to exit and when to enter?

If you think you can do it, then sell and book profits, use stop/loss specially for stocks and wait on. However, nobody knows when you hit the bottom of the 2020 stock market crash.

Tip #2: Stay Put, Time in the Market is more important than Timing the Market!

Solid advice again, most FI bloggers will keep repeating it ad infinitum. There is value in it, there is a great reddit thread which I can suggest you to read.

The underlying belief is that if you continue buying at fixed intervals you will still benefit from the low prices of stocks (averaged out or DCA). Of course, the argument to that is that when stocks are cheap, why not buy more? Afterall, a stock market crash is an opportunity!

And then, there have been so many articles which always talk of a person investing in Market crash of 2008 and then becoming rich, that sounds like timing the market and not staying put.

Tip #3: Stay put, and yet try timing the Stock Market!

This is going to be my approach, and I do not have a lot of spare money just 4-5k EUR which I can time with! It won’t make me a millionaire.

  • I will continue staying put i.e. the long term index funds will continue to be invested automatically, as always planned inspite of the 2020 Market crash.
  • I will spend my spare cash into buying some handpicked stocks which I felt were overpriced, these are mostly large caps and also long term plays. My target price usually is that if my preferred stock is 30-40% cheaper than ATH, it can be a buy.
  • I will not attempt to make short term gains, and that is beyond my risk taking capacity.
  • I recognize the risk that companies I invest in, might go under or not recover for a long term.

Caution: We tend to look at history of stock markets and its rebound to look for recovery. Markets like Japan’s Nikkei was at 27000 in 1991, and after recessions/stagflation, even in 2020 it could only reach a high of 24000. So, beware of confirmation bias.

Nikkei was at 27000+ in 1991, it never got to the same level in 29years!

What is your approach for the impending sell off? Join me on twitter if you want to hear more from me : GetFI Twitter

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Financial Planning Index Funds and Stocks Post

What is a Sparplan? What is Mr A really doing with his Sparplan?

Sparplan (I am so tempted to add a meme on this is SPARtaa..) is the way out of automatically managing your investments each month. It is an equivalent of a SIP (Systematic Investment Plan) if you are an Indian investor.

….when I login to my bank account, I notice two options, geldsparplan and wertpapiersparplan. What is the difference?

I use comdirect, and they have these two options, the main difference is:

  • geldsparplan – This savings plan simply takes money from your account and deposits into a Tagesgeld account which earns a whopping 0.01% interest (as of this morning) p.a. In other words, not worth it.
  • wertpapiersparplan – This savings plan is the one we need, we can setup a monthly investment amount and usually declare ETFs or even stocks to invest in each month.

….how much do I invest in a Sparplan? How much does Mr A invest each month?

As of this morning, I am investing 1098 EUR into my sparplan each month. This is mostly focused on diversified ETFs and 1 tiny piece of Amazon stock. I will write more about this in Portfolio page soon.

Let my number not scare you, I started really slow. I was investing less than 300 EUR/month an year ago and less than 200 EUR/month 18 months ago (2018).

As I have mentioned before and might do so again, we have to start with small steps and get comfortable. It took me a while to get comfortable with the idea of investing, and I started really slowly. I had never invested in Germany and had been programmed to be more cautious.

Can’t guarantee the numbers, but you catch the drift!

You can start with even 25 EURs/month, then and grow from there.

….what do I invest in? What are the pitfalls?

Picking your investments is a massive undertaking, but has been extensively covered in reddit.com/r/finanzen or on frugalisten.de forums.

The key pitfalls are, all investments carry risk, transaction costs charged by your depot account per transaction and TER (annual expenses) must be considered very carefully.

….but can I not simply buy ETFs each month on the go and not bother with a sparplan?

Yes, of course you can, or you can automate it and forget about it. This is the whole premise of the famous book, The Automatic Millionaire. If you really look at it, it just makes sense, one automated step which simplifies your steps to your Financial Independence.

It makes it easier for me to plan it and worry about one less then thing to do each month.

If you have more questions on sparplan, then write into the comments section.

Categories
Financial Planning Index Funds and Stocks

Will the next recession be the end of Financial Independence movement?

I had reserved my second blog post for sharing more about me and where am I starting from in my Financial Independence journey. However, an event much more important has occurred which may impact almost everyone planning for their FI.

Last week on Friday, the long term interest rates on US Bonds fell lower than the short term interest rates. This event, has been a precurser, to every recession in US in the last 60 years. Naturally, this has triggered a recession risk with analysts guessing that a recession is imminent in the next 6-24 months (thats a very wide range of time!!).

As the warning has been triggered, there is already a slight panic and selloff has intensified, across the globe. At the same time some academics and analysts are trying to cull the panic to say that this has not happened consistently for a longer period of time and may not mean a recession is near.

In any case, lets assume that the predictor will hold and we are heading towards the cliff. This means that the market should head for a correction of 20-40% at its worst. This will dip the stocks or index funds invested by this community of Financial Independence aspirants.

Lets look at the illustration below, the VTI was trading at its highest in 2007 (just before the last recession at 74.5 US$ and it fell down to 46.11 US$ on 17 October 2008, and then further to 34.06 US$ on 6 March, 2009. It then needed almost 5 years to reach its old heights in 2013.

The question now is, is it a good time to sell and make profits OR it is just wise to stay on track and not blink as we hit the iceberg?

Its impossible to predict when will the recession risk will or how deep will it be. In the end one needs to think on our feet and act accordingly.

Cheers!