Posted May 06, 2022
By Zach Scheidt
How to Deal With a Manic Depressive Market
I don’t know about you, but I am so glad this week is over!
The market action has been enough to drive me crazy what with price swings… calls from friends… and all of the research it takes to keep up with what's happening.
Of course, I'll be doing plenty of reading this weekend to stay on top of all the different angles.
But I'm also looking forward to taking several hours away from my desk. I'm sure we could all use a little fresh air and a chance to process everything going on.
With so much action in the market this week, I thought it would be a good idea for us to dust off the playbook for handling crazy markets.
Because the truth is, it doesn't need to be this stressful!
By reacting wisely and proactively in today's market, you can better protect and grow your wealth even with these unpredictable swings.
A Manic Depressive Market
This week's market action was nutty...
On Wednesday, the Dow jumped more than 900 points after Fed Chairman Jay Powell said the committee was not considering a rate hike of 0.75%.
Then on Thursday — with absolutely no fundamental change — stocks plummeted sending the Dow down more than 1,000 points.
How is an investor supposed to make money in this kind of environment?!
If you're frustrated with this erratic market, please know you're not alone.
But if you want to avoid frustration in today's market, you need to be proactive in protecting your wealth.
Here are two important concepts that will help you navigate through these turbulent times.
#1: Know the Value You’re Getting
The first thing you need to focus on in today's market is understanding what you’re getting when you buy shares of a stock.
Yes, you own a piece of the company. And it's great to own a company that does something exciting.
But if you were a small business owner, what would your primary focus be?
You would want to make sure you're getting a valuable return on the money you spent to buy the business and the time you spend to run it.
As an investor, you need to take a similar mindset. And especially in today's market, you should demand to get paid a lucrative profit for each dollar you spend to buy your shares.
The best way to know what you're getting is to look at a company's forward price/earnings ratio.
(On Tuesday, I wrote about some of the best free tools you can use to evaluate stocks you're interested in. If you missed it, you can check out the alert here.)
Buying stocks with reliable profits and paying a reasonable — if not cheap — price for them is a great way to avoid the turbulent price swings that are much wilder in other areas of the market.
#2: Get Income to Give You More Options
The second way to succeed in today's market is to invest in a way that gives you more income from your savings.
Here's why that’s important.
When prices are swinging wildly, you can buy great stocks when they pull back. But you can only do that if you have extra cash on hand.
That's where the value of income comes into play!
If you’re already invested in a handful of great dividend stocks, the cash balance in your brokerage account will consistently grow.
After all, if you have 10 dividend stocks that each make quarterly payments, that's 40 cash payments you'll receive each year.
You can use that cash to pick up more shares when other investors are panicking. And that puts you miles ahead of other investors who typically sell stocks when the prices fall.
Yes, this market is turbulent. And yes, there are risks in play, which means you still have to be careful where you invest.
But if you focus on high-quality value stocks and use income payments to buy more shares when prices fall, you'll be able to thrive during this turbulent season and grow your wealth.
It doesn't have to be difficult. But you have to be proactive to stay ahead of the madness.
Here's to living a Rich Retirement,
Editor, Rich Retirement Letter