THE US STOCK MARKET JUST CRASHED! ARE YOU READY TO PROFIT FROM IT?

The US stock market had a major crash yesterday. The S&P500 crashed 3.5% and the NASDAQ -3.7%. This panic was largely triggered by a country-wide lock down in France and Germany over the high Covid-19 infection levels. In US, the Congress continued to have an impasse on the stimulus package and that disappointed the stock markets as well. As a result, the US major indices, along with the Singapore Straits Times index, crashed and may likely to continue to do so.

This got me excited as I have always been a contrarian investor- I love to profit from market crashes, especially when there are fear and blood in the street. Indeed buying on crashes is a frightening experience, but you need more than guts – you need the investment strategy to know how to profit from market crashes. I would like to share my experience of how I profited from market crashes with you below:

- Adopt A Compounding Investment Strategy That Will Stand The Test Of Time

Most investors would attempt to time the market by picking stocks at rock bottom prices and selling them at the highest prices possible. Unfortunately, this strategy is very prone to fear and greed.

As seen in the March/April-20 recent COVID-19 crash, most investors sold out or stayed out of the stock market in March 2020, believing that the stock market would crash further. When the stock market started rallying after 20th March, many believed that it would crash again and stayed out, despite my repeated calls that a powerful bull run is coming. True enough, the bull run subsequently was a record breaking one and many missed out from it.

If you had followed an investment strategy that has proven to compound across time, e.g. investing in the S&P 500, or equivalent funds, you wouldn’t need to catch the bottom of the stock market as the index will eventually compound its way back up over time. Even if you had invested in the S&P 500 at the peak right before each major crash over the last 30 years, you would still sit on huge stock market gains that had compounded at 7-9% annually.

Holding a compounding portfolio will help you resist selling out during market crashes, and develop the confidence in the post-fall rebound.

- Separate Your Cash Reserves Into Two Piles

For your first cash pile, dollar cost averaging (DCA) into the S&P 500 or equivalent global fund would be a timeless and proven investment strategy. Good investors who set aside a significant portion of their savings to be regularly invested through DCA, regardless of the stock market conditions, have gained healthy returns over a long time horizon.

For your second pile, your “dry powder”, divide it into 5 to 10 “bullets” and start firing them into the S&P500 when it is down by 20% to 25% from the peak, during a major crash. Phase out your buying and buy regularly on the decline as well as on the rise.

During the recent COVID-19 crash, I usually invested once every one or two weeks. As most people would find it scary to buy during the crash, I found it very useful to have the company of like-minded seasoned investors (e.g. like those our 1M65 discussion group) during these periods.

- Minimise your investment in Singapore stocks or the STI

Most Singapore investors love to buy Singapore shares, largely out of familiarity and because they mistakenly believe that Singapore blue chips and REITs are immune to market crashes. These investors suffered a rude shock from the recent COVID-19 market crash. These are my reasons why we should minimise our investment in Singapore stocks:

– Unlike the the S&P 500 or Nasdaq companies, our SGX stocks (including STI component stocks), are largely localised in Singapore, with some exposure to the region. They are very susceptible to global economic shocks, as seen in 1997 Asian Financial Crisis, 2008 Global Financial Crisis and now 2020 COVID-19 Pandemic. Compared to the S&P500 or the Nasdaq, there are very few good high tech or global MNCs in our SGX or STI index that could defy the gravity of the Covid-19 market crash.

– Stocks listed on the SGX, especially the STI, crash fast and rebound slowly, compared to US indices (I have previously written about this extensively here and here). The SGX stocks have completely missed out of the current US stock market bull run. Remember that the STI has never recovered from the 2008 market crash, let alone the recent COVID-19 crash.

– If your job, home, savings, CPF, are all based in Singapore, isn’t it financially prudent to geographically diversify your investment away from Singapore?

- Avoid Stock Picking And Buy Diversified Indices Like The S&P 500

Very few investors, even fund managers, can pick stocks and beat the S&P 500 consistently. No matter how many times I tell this to everyone, many investors would ignore this advice and try to stock-pick, especially Singaporean investors. Even the US market bull run is largely driven by a handful of tech stocks, which requires guts, luck and the sharpest of minds to pick out from the universe of stocks.

Wouldn’t it be safer and simpler to adopt a compounding strategy like indexing the S&P 500 when you know that it will eventually recover and compound at a good growth rate?

- Build A Financial Safety Net With Your CPF

Many Singaporeans viewed my 1M65/4M65 CPF strategy as a way to retire rich. While that is true, a strong multi-million-dollar CPF retirement fund also serves as a powerful financial safety net in your investment portfolio.

During stock market crashes, it is comforting to know that your CPF is safely and securely compounding at a high-interest rate. This will calm your investment fears and enable you to utilise your “dry powder” during major stock market crashes like the recent COVID-19 crash.

Be Greedy when others are Fearful

– It is a timeless quote from Warren Buffet that I love.

I hoped you have learnt enough from previous market crashes to know that you have to develop a solid investment strategy to capitalise on market crashes. I believe that the investment tips above would be useful to you as they were useful to me all these years in making profits from the stock market.

This article is updated from a previous published article from Dollars and Sense.** _Loo Cheng Chuan, is the Founder of the 1M65 Movement. He developed the 1M65 ($1 Million By 65 Years Old) CPF investment strategy that is helping many Singaporean couples to become millionaires at retirement. He was one of the few non-civil servants to be awarded the Public Sector Transformation award in 2018 for his 1M65 efforts. He runs a [1M65 Telegram Chat Group_](https://t.me/Loo1M65) where he regularly coaches passionate 1M65 enthusiasts on good personal finance virtues. Loo and Kate (his very comical daughter) runs a **[_1M65 Youtube Channel ](https://www.youtube.com/channel/UCd273tHeZ_v8miEED5MZasQ)to share good financial tips in a entertaining way!_