** Not financial advice, I am sharing my investing education journey with my dearest readers. :)
Dearest readers, your (favorite?) investing noob is at it again! ;) Lately due to markets starting to turn a little bearish on the news of interest rate hike possibly happening earlier than anticipated as well as the fact it has to happen for sure, I have been learning about bear markets and stock market crashes a little more. Fascinating stuff, scary as well. The reason why I am learning about it is because markets do not stop when they go bearish, and what we need to do is adjust our paradigm, approaches and tactics, and keep at it. If the entire world opted out of a bearish market, there would be no bullish market- or any market- it would all go down to zero. That said, I have studied and identified the most important feature of a bear market. Typically, both bull and bear markets seem to have hot sectors. However, the problem with a bear market is that stocks go down, then they go flat and hit a mini rally that does not last long because people lost faith and want to take profit faster, and then the price keeps sliding down and it is rinse and repeat; lower highs and lower lows. Many fellow noobs I talk to say no problem, just wait until your favorite stocks or ETF's hit the bottom and buy them up then, hold them until they reach the top. The problem is, I understand things well enough to know there is no such thing as accurately buying at a bottom and selling at the top; there is only pursuit of yield. So, when I asked around how people deal with it in a bullish market, I was told that you do not go all in but instead you split your money into blocks and keep adding up to your position that you get into when a stock seems to be starting an uptrend. Now how about the bear market? It turns out there are two approaches worth talking about- averaging down and loading up.
Averaging down on a stock, ETF or crypto means you keep buying it as it goes lower. Or, that is a rather incomplete, half-assed definition of it. When you leave it as is, it is no wonder that a YouTube search produces almost exclusively a list of results going back many years telling you that this is a bad idea. Instead they say buy into winners as they go up and you will keep winning this way. Well, that is excellent advice in a long-term bull market, but as things stand this will not serve us well in the years to come when we the markets go grizzly bear and they keep swatting equity prices down (for the most part). So, how do we expand the definition of averaging down to actually serve us well? We choose what to average down on carefully. In a bull market, there are stocks that keep running up like crazy for no good reason and the underlying companies are not really financially sound nor do they offer any valuable, vital, irreplaceable or industry or sector leading products and/or services. In a bear market following a stock market crash, stocks like that may not come back to their pre-crash highs and may even crash so hard as to get de-listed from major stock exchanges (bye bye NYSE, hello OTC?). Typically, if it were me I would not average down on these. On the other hand, you have sound companies providing important and/or high demand products and services that are likely to blow past their pre-crash highs at some point and are good average down candidates. Amazon is a great example of a company where averaging down would have been a sound approach.
The other option is to load up on a stock. Loading up is something that I would, based on my current understanding, define as an advanced version of averaging down. So let us say you pick a stock to average down on some time after everyone and their mom is saying a market correction has turned into a crash. You divide your money into blocks and you start buying as the price goes down. You listen to finance news here and there, you check the stock price, you buy and then it is rinse and repeat. You end up using all of your money and the price still keeps going down- nobody expected things would get that bad. Your money is now trapped until the price goes back up so you break even, and then you have to let it go up which would also take some time. This is averaging down. Loading up means you pick a stock or create a portfolio, divide your money into blocks, define your time frame for your charts and you use technical analysis to spread out your average down purchases in a strategic, informed and intelligent way. A stock price going down is not an adequate reason to average down some more. You need to see if the price broke through a certain support level and if it established a new one. Maybe, depending on the amount of money you have and your chosen time frame, you want to skip a few support levels and only buy in at every second or third one. Why watch for these levels? Because no one really knows when a stock might rally, or when a stock market as a whole may go from bearish to bullish. Every major support level is a possible reversal- anything in between support levels looks like no man's land and loading up in no man's land does not make much sense for mere mortals like most of us haha. So, when you load up like this, another thing you seem to be able to do is take your stock average price and use mini rallies that create lower highs in bear markets to profit more frequently. Now, why would you do that instead of just letting it ride? It is all about yield. If you use up most or all of your money blocks loading up on a stock and then lucky for you it goes on a mini bull run inside a bear market, if the price goes beyond your average stock price and your are satisfied with the profit, you may want to take that profit because the next decline in a bear market is more likely to generate a lower high than a higher high.
Bottom line, I now firmly believe that you cannot and should not YOLO your hard earned money into stocks crypto or what have you, now or ever. If you decide to take some of your disposable income or non-RRSP savings and invest them personally, whether we are in a bull or a bear market, one thing is clear- you cannot take a hands-off approach and the best thing you can do is learn, learn and of course learn some more. :)
Dearest readers, your (favorite?) investing noob is at it again! ;) Lately due to markets starting to turn a little bearish on the news of interest rate hike possibly happening earlier than anticipated as well as the fact it has to happen for sure, I have been learning about bear markets and stock market crashes a little more. Fascinating stuff, scary as well. The reason why I am learning about it is because markets do not stop when they go bearish, and what we need to do is adjust our paradigm, approaches and tactics, and keep at it. If the entire world opted out of a bearish market, there would be no bullish market- or any market- it would all go down to zero. That said, I have studied and identified the most important feature of a bear market. Typically, both bull and bear markets seem to have hot sectors. However, the problem with a bear market is that stocks go down, then they go flat and hit a mini rally that does not last long because people lost faith and want to take profit faster, and then the price keeps sliding down and it is rinse and repeat; lower highs and lower lows. Many fellow noobs I talk to say no problem, just wait until your favorite stocks or ETF's hit the bottom and buy them up then, hold them until they reach the top. The problem is, I understand things well enough to know there is no such thing as accurately buying at a bottom and selling at the top; there is only pursuit of yield. So, when I asked around how people deal with it in a bullish market, I was told that you do not go all in but instead you split your money into blocks and keep adding up to your position that you get into when a stock seems to be starting an uptrend. Now how about the bear market? It turns out there are two approaches worth talking about- averaging down and loading up.
Averaging down on a stock, ETF or crypto means you keep buying it as it goes lower. Or, that is a rather incomplete, half-assed definition of it. When you leave it as is, it is no wonder that a YouTube search produces almost exclusively a list of results going back many years telling you that this is a bad idea. Instead they say buy into winners as they go up and you will keep winning this way. Well, that is excellent advice in a long-term bull market, but as things stand this will not serve us well in the years to come when we the markets go grizzly bear and they keep swatting equity prices down (for the most part). So, how do we expand the definition of averaging down to actually serve us well? We choose what to average down on carefully. In a bull market, there are stocks that keep running up like crazy for no good reason and the underlying companies are not really financially sound nor do they offer any valuable, vital, irreplaceable or industry or sector leading products and/or services. In a bear market following a stock market crash, stocks like that may not come back to their pre-crash highs and may even crash so hard as to get de-listed from major stock exchanges (bye bye NYSE, hello OTC?). Typically, if it were me I would not average down on these. On the other hand, you have sound companies providing important and/or high demand products and services that are likely to blow past their pre-crash highs at some point and are good average down candidates. Amazon is a great example of a company where averaging down would have been a sound approach.
The other option is to load up on a stock. Loading up is something that I would, based on my current understanding, define as an advanced version of averaging down. So let us say you pick a stock to average down on some time after everyone and their mom is saying a market correction has turned into a crash. You divide your money into blocks and you start buying as the price goes down. You listen to finance news here and there, you check the stock price, you buy and then it is rinse and repeat. You end up using all of your money and the price still keeps going down- nobody expected things would get that bad. Your money is now trapped until the price goes back up so you break even, and then you have to let it go up which would also take some time. This is averaging down. Loading up means you pick a stock or create a portfolio, divide your money into blocks, define your time frame for your charts and you use technical analysis to spread out your average down purchases in a strategic, informed and intelligent way. A stock price going down is not an adequate reason to average down some more. You need to see if the price broke through a certain support level and if it established a new one. Maybe, depending on the amount of money you have and your chosen time frame, you want to skip a few support levels and only buy in at every second or third one. Why watch for these levels? Because no one really knows when a stock might rally, or when a stock market as a whole may go from bearish to bullish. Every major support level is a possible reversal- anything in between support levels looks like no man's land and loading up in no man's land does not make much sense for mere mortals like most of us haha. So, when you load up like this, another thing you seem to be able to do is take your stock average price and use mini rallies that create lower highs in bear markets to profit more frequently. Now, why would you do that instead of just letting it ride? It is all about yield. If you use up most or all of your money blocks loading up on a stock and then lucky for you it goes on a mini bull run inside a bear market, if the price goes beyond your average stock price and your are satisfied with the profit, you may want to take that profit because the next decline in a bear market is more likely to generate a lower high than a higher high.
Bottom line, I now firmly believe that you cannot and should not YOLO your hard earned money into stocks crypto or what have you, now or ever. If you decide to take some of your disposable income or non-RRSP savings and invest them personally, whether we are in a bull or a bear market, one thing is clear- you cannot take a hands-off approach and the best thing you can do is learn, learn and of course learn some more. :)