Monday February 5th 2018, was the worst single day for the Dow Jones Stock Market Index in its history. How did I react to that scary drop when the investor in me felt a little bit of nervousness? I decided to buy $21,000 worth of stock.
I’m going to start talking more about about real-life money and investing scenarios on this blog. Up until this point, I’ve written mostly about the underlying philosophy of building wealth. But I am going to start writing more about my investing decisions and what I learn as I go. In fact, I am going to start a new column titled, “The Journey to a Millionaire,” which will document the financial decisions I make as I journey toward a million-dollar net-worth. Why do I want to be a millionaire? It’s pretty simple: Once I am a millionaire, I won’t have to think about money anymore. I can then think about what God wants me to do with my life full-time. So far, I am about a quarter of the way there. Follow my journey as I succeed and fail, and ultimaty learn. Hopefully I can inspire others to start their own journey to be a millionaire with me.
Today I want to start this “Journey to a Millionaire,” column by talking about my decision to buy $21,000 worth of stock on the same day (Monday) that the Dow Jones Industrial Average was having it’s worst day in history.
I want to mention this point if you’re going to develop the mentality of an investor: Sharp drops in stock prices will lead to 2 different sets of feelings you must be aware of in order to know how to respond to the drop.
1) The first feeling is fear. If you have a lot of money already invested, it’s scary to see some of that money disappear into thin air. Poof. Losing money is the worst thing an investor can do, so don’t sell low. Learn to be patient and try to figure out what’s going on before you make a decision that will lose you money.
2) The second feeling an investor will feel when prices plummet is excitement. You feel excitement because if you’re prepared to buy, a drop in prices can lead to great buying positions where many of the investments you need to grow wealth are all on sale for a short time.
When the Dow dropped on Monday, I was prepared to buy. I’ve been saving our money in cash ever since we bought our first investment property in May because the stock market had kept going up since that time. So as the Dow Jones had it’s worst day in history, I was in a pretty rock-solid buying position. I had more cash on hand than I needed, and I could invest $21,000, and still have my 6-month emergency fund in place. In fact, I had been prepared and waiting for a bad day in the stock market for a few months now. I’ve been waiting for a “correction” or a “dip” in the market that would cause stock prices to drop and basically “go on sale” for a short period of time. I first started noticing the Dow Jones dropping last week. That inspired me to start watching it closer, wondering if this was going to lead to the buy-in moment I was looking for. I was targeting at least a 2% drop, and hopefully a 4% drop. I ended up getting an 8% drop, and I closed on it. This is how it unfolded:
On Monday, Jan 29th, the Dow Jones dropped 177 points. Such a small drop didn’t inspire me to buy, but it caught my attention. On Tuesday, Jan 30, it dropped another 363 points. Now that we had multiple bad days in a row, I got more intrigued and started pondering in my buy-in price. I targeted my buy-in price at a 5% drop. On Wednesday and Thursday, it mostly plateaued, gaining 73 points over those days. And then on Friday, it really dropped, dropping 684 points in one day.
I remember being very close to pulling the trigger on that Friday when it was down 4%, and buying back a majority of the stock I sold to buy our first investment property in May. To try to understand what was happening, and what I should do, I started watching Yahoo Finance that day. Professional investors (with a lot more experience than me) were all saying the signs of a strong economy (tax reform, unemployment, and corporate profits) remained healthy, and they believed there was a good chance that the stock market would most likely rebound quickly from the temporary dip. If I chose to believe them, I realized this would be a good time to buy in. Buy low and sell high is the name of the investing game, and I was buying at a 4% discount from a week earlier.
I’ve been waiting for the market to give me a good buy-in moment for the last 6 months. I had a strong cash cushion in the bank (6 months of cash), and I’ve been wanting to get some of the excess cash I’ve been holding back into the market so it’ll make me more money. The upcoming tax season was also influencing and pushing me to buy sooner than later because I only have 2 months (April 15th) to get both of our 2017 $5,500 tax-free IRA and Roth IRA contributions invested.
Seeing this market has been consistently strong for the last year, and this was a “flash drop” I had to make a decision fast. Was this my time? Or should I wait a few days to see if it would drop more? But investing and trying to time the market isn’t that easy. I knew the markets could rebound in a day and the dip could instantly disappear. I wasn’t sure what to do. While listening to Yahoo Finance, I heard a reporter say, “We don’t know what will happen on Monday, but historically, Monday is often an even more turbulent day than a bad market on a Friday.”
I ALWAYS look to historical clues to influence my investing strategy, because history often repeats itself, especially when trying to interpret financial markets. At that moment, I decided I’d be patient and wait until Monday to pull the trigger. Not because I knew I’d be able to buy in at a better price, but because I liked the idea of being patient and thinking about my strategy a little more over the weekend. I wasn’t desperate to invest. Almost all the deals I ever make are made with a long-term vision, so no matter what the market did in the short-term, I knew I’d still win in the long-term.
Over the weekend, I decided I’d invest my precious cash if the market gave me an opportunity on Monday. On Monday it did. The Dow Jones dropped 1,175 points in one day, which tuned out to be the worst drop in the Dow Jones history. The market was now down 8%. As it happened, the professional investors were saying they didn’t see any signs of a horrible situation. It was just a healthy correction where market prices had gotten ahead of themselves, and they were just coming back down to earth by 8%. Rather than being afraid of making the wrong decision, I chose to see the drop as a moment where all of the stocks I’ve been wanting to buy were on a one-day 8% sale. And so I pulled the trigger and bought them.
I first maxed out my wife and I retirement IRA accounts ($5,500 each) buy buying more shares in our Vanguard target-retirement-funds, so $11,000 went there. And since we’re still a little real-estate heavy (My financial happy-place is a 50/50% split of stocks and real-estate) I wanted to buy back the mutual funds I sold in April 2017 to buy our first investment property and beef up our stock holdings. It takes an initial investment of $10,000 to buy my favorite mutual fund, Vanguard’s VTSAX admiral shares, and so I pulled the trigger on another $10,000 investment and bought back $10K worth of those shares.
I made all my buys before the market closed at 4 PM Eastern, and then I waited. Honestly, I didn’t know what would happen in the short-term. If the professionals on Yahoo Fiance can’t predict the next day, then no one can. But I felt confident in my buys. The market was down 8%. The stocks I wanted were on sale. I had prepared for this moment and I had the cash ready I was planning for the long-term.
The next day the market re-bounded as I was hoping it would, and the Dow Jones rallied back 567 points. My stock values increased $500 in the one day the market rebounded. But I don’t really care about a one-day profit. I’m more interested in what $21,000 invested-dollars will look like in 10 years. Will it grow into $50,000+? I don’t know. But I look forward to taking the journey to find out.
Did I make the right decision to buy when I did? Today it looks like I did, and I am hopeful I did. But next week it could drop another 20%, and I’ll be kicking myself for not buying in then. With the market, you just never know in the short-term. But in the long-term, you’ve got a long historical track record to study and feel good about. The only thing you ever know when you’re investing is that if you don’t take any risk, you’ll never experience any great reward. If you don’t invest, you’ll either waste your money buying a bunch of consumable crap you don’t need, or inflation will slowly eat your cash like it’s a moth and the cash in your bank is an old sweater.
So that’s why I chose to invest $22,000 on the worst day in the Dow Jones history. One day I want to be a millionaire so I never have to think about money again, and I can think about what God wants me to do every day of my life. I hope you want to be a millionaire too. We can do this together. You’ll never know what you can accomplish unless you try.
Read the Follow Up post to this Article I wrote 3 days later: “%^[email protected]#@ The Stock Market!”
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What it, instead, you had put that 21k in the market earlier instead of waiting for a drop?
That’s a great question and it provides me an opportunity to clarify something. The reason I didn’t put it in sooner was that I didn’t have the majority of it saved until December 2017. You can’t invest money that you don’t have. When we bought our first investment property in May of 2017, we pretty much put all of our extra cash into the $53K down payment. SO it took us 7 months of saving to get our emergency fund back in place, and by the time we had extra cash I wanted to invest, I was in a pickle: Either buy in as the market was skyrocketing to new records everyday, and overvalued in my opinion, or wait patiently for a dip and better buy-in opportunity. I decided to try the wait patiently approach and see how that worked out. The market will always dip, it’s just when. In this situation, when the market did dip, I was prepared to jump in.
I’m a total supporter of the “set and forget” strategy of just putting a portion of your paycheck into automatic investments. But I am self-employed, so I don’t have a steady/guaranteed paycheck that I can count on, or “set and forget” options in an employee retirement plan. I also just like the fun of watching the market and trying to find the best value in it as it goes up and down. It’s entertaining, and honestly, a just a fun hobby for me. I used to be addicted to following sports every evening. Learning how to invest is a MUCH healthier and more profitable hobby for me. 🙂
We also put a sizable chunk in Monday thanks to a recent self employed paycheck. I wouldn’t setup dry powder as it just messes with you asset allocation in the long run, but I also don’t stop my bits for dips.