Fortunes, they say, are made during recessions.
Naturally, your first question would be — how? When you open your stocks portfolio and your investments are down, by a lot, it is understandable to ask ‘how in the world does this help me?’
Well, the team at Rise is happy to explain.
First, you are investing to get higher returns in the future. That is a given. As a matter of fact, it’s the whole point of investing.
So consider this: if a stock produces $10 in dividends and is selling for $100, your returns on the stock will be roughly 10%. Not bad, right? Simple enough.
Now, what if you could buy that same stock for just $50? Now you can buy 2 of it for the same $100 and get returns of $20, or 20% on the same $100 investment. Yes?
Let’s say you owned one of the stock already at $100, then bought 2 when it fell to $50. You’re technically down -50% on your original $100 investment, but now you’ve bought 3 stocks for $200, generating $10 dividends each or $30 in total. That’s a 15% total return.
What if the stock producing $10 in dividends was selling for only $20? Wouldn’t you buy 5 of them for $100, and get $10 on each, $50 in all? That’s a 50% return on that investment and if you add it to your existing portfolio that means you now bought 8 stocks for $300, generating $80 in dividends or 27% total return.
Now all of this doesn’t even consider when the stocks go from being sold at $20, or $50 back to $100 or even $150. You now have a huge amount of capital gains profit (that is profits from the increased price of the asset) on top of your dividends. That is additional returns you can cash out from your investment.
The lower the price you buy the shares the bigger your returns you make. But then you ask, who would sell a stock paying $10 and worth over $100 for around $20 or $50? The answer should normally be, nobody. But during a recession, you see this happen all the time.
In a recession, everyone panics and starts selling their investments because they see their money go down. Fear makes people think I need to get my money out. And this makes them push down the prices of stocks so much that even great, high-value stocks are being sold for very cheap. Everyone wants to flee to safety.
That’s when the buying opportunity comes. When you buy in recessions, you buy cheaply, and you buy high returning stocks at great prices. When the market eventually recovers you find yourself sitting on large percentage returns because you bought at insanely good prices.
As Warren Buffet would say, be fearful when others are greedy and be greedy when others are fearful. When fear takes over the market like in a recessionary period, the astute investors becomes happy because its shopping time and good stocks are being sold for cheap.
For us at Rise, we continue to recommend the same simple formula. Invest consistently, and when recessions hit, keep on investing. Don’t react based on fear. Stick to the plan. Your long term returns will be better for it. Ask Warren Buffet, he’ll tell you the same thing.