The New Rules of Investing

October 12, 2021

Not sure where to begin with investing? Here are a few new rules of investing that new and old investors should keep in mind.

This isn’t your grandfather’s market anymore. Just look at 2020, which was kind of the stock market equivalent of a horror movie.

And while your grandparents might have a few tidbits of sound investing advice, the reality is that the rules of investing change as the game evolves and the economy changes. And if you’re operating on an outdated or incorrect rule book, you’ll be left behind.

Here’s a look at the new rules of investing that every investor ought to know.

Stay Invested

Listen, we get it. It’s scary when the market feels more like a roller coaster without screws on the tracks. But here’s the thing: the market has recovered from every crash it ever experienced. It was terrifying in the meantime, but it recovered.

As investors learned after frantically selling stocks in the market slide in 2020, timing is everything. Unfortunately, some markets are impossible to time, and either way, panicked investors are bad at it.

Those investors who scrambled to sell in 2020 discovered that this market didn’t behave the way they expected. Unlike the Great Recession, the market didn’t grind lower for a good long while after the initial fall. Instead, the market rebounded in a much shorter period. That meant investors who sold didn’t have the time or luxury to wait and buy back in.

In plain English? They would have been far better off if they stayed invested and rode out the ups and downs. The same goes for you.

Buy the Crisis

What if we said that you should buy shares instead of selling when the market is in free fall? If that sounds loopy, hear us out.

Yes, it’s nerve-wracking and panic-inducing to buy when the market is in free fall. You won’t see returns right away. But if 2020 taught us anything, it’s that governments and central banks will do anything they can to bail out their economies. COVID-19 spending showed a greater propensity than ever to pour relief funding into tumbling sectors. Their resources are not unlimited, but the stopgap funding is still there.

Your best approach if you’re not already invested is to buy into the crisis early with a careful eye toward sectors that will likely see a strong rebound once the economy is thriving again. This type of contrarian investing will be anxiety-provoking for many investors and plenty of people might look at you like you’re nuts, but if the market rebounds, you won’t have time or resources to buy in.

It’s hard. It’s scary. But you have to take a calculated look at the situation and be willing to buy on the worst market days knowing that governments will intervene and the market will eventually rebound.

Buy Damaged Stocks, Not Damaged Companies

Don’t be Afraid of Taxes

As the old adage goes, there are two certainties in life: death and taxes. Many investors would rather face death than taxes, even if it means riding it out for a long-term gain and not having to pay taxes because there was nothing left to tax.

We’re here to tell you to make your peace with your tax guy.

People have hated taxes for as long as governments have collected them. One way or another, you’re going to pay them. That’s a constant. Investing gains, however, are not constant. They’re ephemeral. Unlike taxes, gains cannot be counted on.

For this reason, you need to stop dodging your tax guy and start dodging the specter of investment loss. Be afraid of loss, not taxes. Instead of riding for a long-term loss just to avoid taxes, take your gains when they appear unsustainable and swallow taxes as the cost of doing business.

Expect Corrections Without Fearing Them

The stock market is unpredictable, but it follows a predictable pattern when viewed in small pieces. One example is stock market corrections, which is when the market falls 10% from its 52-week high. This generally happens due to an event that kicks off panicked selling, resulting in a predictable market drop.

This is not to be confused with a crash. A correction sees a 10% drop manifest over weeks or months, while in a crash, it happens in a single day.

As you can guess, these happen somewhat regularly—every bull market in the last 40 years has had a correction. The point is that corrections happen like taxes, which is to say inevitably.

Smart investors welcome corrections rather than fearing them, and unlike everybody else, they don’t sprint for the exits. A correction creates a pullback in prices that consolidates the market before a high, which makes it a good time for clever investors to take advantage knowing that the market will rebound in three months or so.

Hedge Against Inflation

Inflation is the decrease in purchasing power of money which happens over time. This is reflected in the average price level of a basket of selected goods and services over a period of time. Depending on your viewpoint and the rate of change, this can be a good thing or a bad thing.

Either way, you ought to hedge against it. After all, you can’t predict how inflation will change, but you can control the measures you take to counterbalance it.

The best way to do this is by using assets with a low correlation to the stock market that are expected to hold steady or increase in value over time regardless of how the market performs. For many investors today, a popular way to do that is with blue-chip art.

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