From February 19th through March 23rd the market as measured by the S&P 500 ETF (SPY) generated total returns of -33.7%. The stock market lost about one third of its value in just over a month.
And then the market went on to recover and hit new highs within 2020.
We don’t try to guess what the market will do in the future at Sure Dividend…
But one thing is certain, there will be another stock market crash at some point.
It may not be this year (or it may turn out to be this year…), but it will happen again eventually. That’s the nature of financial markets.
The lesson to learn from the COVID-19 crash and subsequent recovery is that you don’t have to fear market crashes. You can benefit from them instead.
This article explains how you can profit from market crashes in 4 steps.
Step #1: Don’t Panic Sell
The first thing is to understand what not to do…
We believe perhaps the single biggest mistake most investors make is selling when the market crashes. This means getting out of stocks at the worst possible time.
Many people get ‘fed up’, and go back to investing in less risky securities (with much lower expected returns), like bonds. This in effect ‘locks in’ losses from a market crash. And that’s how wealth is transferred from temperamental investors to patient investors who buy during recessions.
We don’t want any Sure Dividend readers to see their wealth transferred to more patient investors during tumultuous economic times.
Step #2: Think In Terms Of Portfolio Income
Fortunately, there is a different way to invest that makes recessions an opportunity to be seized rather than a danger to be feared.
Here’s how – instead of thinking in terms of portfolio value, think in terms of portfolio income.
Instead of saying ‘my investment account is worth $1,000,000‘, think ‘my investment account generates $40,000 in income annually for me‘.
Note: The above portfolio would have a 4% dividend yield.
This puts the focus on what your investment account does rather than on its value (which is subject to market whims).
It also means investing primarily in income producing securities.
At the end of the day, almost all of us are investing for security and income. What matters is consistent (and preferably rising) income payments from our portfolio, not the dollar amount of the portfolio.
Here’s a real world example. Aflac’s (AFL) share price declined over 70% (ouch!) from the beginning of 2008 to the depths of the Great Recession. But its dividend went from $0.12 per quarter to $0.14; the company increased its dividend while the market was panicking. Market prices went crazy, investment income was stable, and actually increased slightly.
In the above example, income investors would’ve seen their dividend income coming in and not much would’ve changed in life (except getting a small income raise). Investors focused on price would’ve probably panicked and sold, locking in huge losses (depending on when one purchased Aflac).
Step #3: Buy When Others Are Selling
But here’s where things get really exciting… When you focus on income instead of prices, you can profit from market crashes.
Take a look at Aflac again. It yielded under 2% before The Great Recession. When its price was in free fall, and people were panicking, Aflac’s yield briefly went above 7%.
Said one more time, Aflac’s yield went from under 2% to over 7%. This is the same company, just at different times. When you buy makes a big difference.
You can use market crashes to your advantage by thinking of them as deep discount sales on great businesses.
“Be fearful when others are greedy and be greedy when others are fearful”
– Warren Buffett
You can take advantage of ‘fire sale’ prices during market crashes by:
- Selling overvalued securities and then reinvesting the proceeds into the most undervalued securities
- Adding new funds into the market
- Or investing some of your excess dividend income during recessions
Keep in mind, for every seller there is a buyer in the stock market (assuming a trade gets processed).
When people are panic selling, savvy investors are quietly on the other side of those transactions snapping up great businesses at absolutely unfair prices.
It isn’t fair for the sellers (it is their choice though), but it’s very profitable for buyers.
Step #4: Find The Right Income Securities
Once you have the income investor mindset in place, the next questions become:
“Where do I find the right income securities to add to my portfolio?”
And that’s where The Sure Dividend Newsletter becomes very useful.
Each month we release our top 10 dividend growth stock buys in The Sure Dividend Newsletter. The process we use to find our Top 10 best dividend growth stocks each month is explained below.
It all starts with our 650+ (and growing) income security research hub, The Sure Analysis Research Database.
We analyze almost all the securities in Sure Analysis on a quarterly basis. This means we do more than 2,600 reports a year in Sure Analysis.
Note: The Sure Analysis Research Database is our highest tier of service. It includes The Sure Dividend Newsletter. The Sure Dividend Newsletter does not include access to The Sure Analysis Research Database.
Please click here to download a sample Sure Analysis Research report to get an idea of the level of analysis provided in Sure Analysis. Then multiply that by ~650 reports, updated 4 times a year, and you get an idea of the scope of analysis involved.
The culmination of our 2,600+ analysis reports a year is apples-to-apples comparisons on 650+ income securities for metrics that matter like:
- Dividend yield
- Fair value price
- Dividend Risk score
- 5 Year forward growth rate
- 5 Year forward expected total return
We use the data from The Sure Analysis Research Database as the primary basis for the Top 10 dividend growth stocks each month in The Sure Dividend Newsletter.
We put in the work to provide investors with timely and actionable investment research on dividend stocks.
Note: The Sure Dividend Newsletter is published monthly, always on the first Sunday of the month.
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