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Most people know how to make money when the markets are going up. But very few people know how to make money when the markets are going down.
Let me show you how we would have protected your money during the market crash in 2008, and again when the market crashed in Q1 of 2020 – by FLEXING your investments.
Let’s start with a question: When you go shopping, do you like to purchase items for the full retail price, or do you like to purchase items on sale?
It won’t shock you to hear that most people want the best possible price. They will wait for an item to go on sale. So, when the markets fall 20%, 30% or even 40%, why are most people running for the door? The markets are on sale!
You just might be familiar with a guy by the name of Warren Buffett. One of the TOP investment wizards in the world, and one of the planet’s wealthiest people, of course.
Warren likes to say that when markets are going UP and people are being greedy, that’s when he is most nervous. But when the markets are going DOWN and people are starting to get nervous or panic, that is when he plans to be greedy!
How do the markets traditionally work? Let me share some insider knowledge with you. When Equities go UP, Fixed Income goes DOWN. When Equities go DOWN, Fixed Income goes UP.
They act in opposite directions.
Balanced Investments are made up of both Equities & Fixed Income. In turbulent times (i.e. a market correction), Balanced Investments do what their name implies: they “balance” out.
Here is the big question: when the markets go down, do you have a FLEX Plan?
Let’s turn the clock back to 2007, prior to the stock market crash of 2008. Let’s assume that you gave us $1,000,000 to invest. We would invest it into what we call a “Flex Plan.”
For example, we would invest the $1,000,000 evenly across Fixed Income, Balanced, Foreign Equity, and Canadian Equity. In other words, we would invest $250,000 into each category.
Let’s assume each category was trading at $10/share, which means we would have a total of 25,000 shares in each category:
Fixed Income $250,000 @ $10/share = 25,000 shares
Balanced $250,000 @ $10/share = 25,000 shares
Foreign Equity $250,000 @ $10/share = 25,000 shares
Canadian Equity $250,000 @ $10/share = 25,000 shares
100,000 shares
100,000 shares @ $10/share = $1-million
To recap, we would have 100,000 shares @ $10/share, for a total of $1-million invested in the marketplace.
Now turn the clock forward to 2008, when the markets crashed and Equities got hit hard.
In fact, Canadian Equities lost 50% of their value. In the above illustration, they would have gone down to $5/share.
Foreign Equities were down 40%, so in the illustration, they would have been trading at $6/share.
Balanced investments did what their name implied and balanced out. In other words, they stayed at $10/share.
Fixed Income was up slightly, at $12/share.
In other words, after the 2008 crash, your portfolio would look like this:
Fixed Income 25,000 shares @ $12/share = $300,000
Balanced 25,000 shares @ $10/share = $250,000
Foreign Equity 25,000 shares @ $6/share = $150,000
Canadian Equity 25,000 shares @ $5/share = $125,000
$825,000
As you can see, when we total up the portfolio, it is now worth $825,000.
Now what? You would have called me on the phone and said, “John, I gave you one million dollars to invest and now it’s worth $825,000. You’re doing a terrific job!”
Yes, I am being just a tad sarcastic.
So, what do we do now? We have three options.
Option #1
Most Financial Planners would tell you, “Don’t worry, the markets will come back.” So we could do nothing and sit on the sidelines and watch your $1-million go down to $825,000 and eventually back up to $1,000,000 and say, “Wow, I’m glad I didn’t lose any money.”
But you also didn’t make any money.
Option #2
You could write a cheque and invest more money, because now is the time of “maximum financial opportunity,” but you might say, “I’m all tapped out and can’t outlay any more cash right now.”
Option #3
We FLEX your plan to make even more money. Let me show you what I mean.
Do you have an expensive hobby that you like to do or play? Perhaps golf.
Let’s say you are in the market for a new set of clubs. If you walked by a store on Monday and saw a brand new set of golf clubs for $2,500 and then you walked by on Thursday and saw the same set of clubs on sale for $1,000, would you buy them? Absolutely you would.
This is the same type of thinking we have to have when the markets are down. When the markets are down, do you think the telephone companies are still going to make money? What about the banks – do you believe they’re still going to make money?
Of course they are.
The intrinsic values are still in the companies we have invested in. What we have seen over the past 50+ years is that markets do go down – but they always come back.
So let’s FLEX your plan!
See those Canadian Equities in your portfolio? They are on sale! At $5/share. So we are going to sell off your Fixed Income to buy the Canadian Equities – an additional 60,000 shares of them ($300,000/$5). We already had 25,000 shares of Canadian Equities, so in total we now have 85,000 shares.
Great news! Your Foreign Equities are really on sale too. So we’re going to sell off the Balanced Funds to buy more Foreign Equities. We will get an additional 42,000 shares of them ($250K/$6). We already had 25,000 shares of Foreign Equities, so in total we now have 67,000 shares of them.
Fixed Income 25,000 shares @ $12/share = $300,000
Balanced 25,000 shares @ $10/share = $250,000
Foreign Equity 25,000 shares @ $6/share = $150,000
Canadian Equity 25,000 shares @ $5/share = $125,000
$825,000
Hence we have 85,000 shares of Canadian Equities and 67,000 shares of Foreign Equities, for 152,000 shares in total:
Canadian Equity: 25,000 shares + 60,000 shares = 85,000 shares
Foreign Equity: 25,000 shares + 42,000 shares = 67,000 shares
152,000 shares
Now, let’s fast forward the clock to late 2009 / early 2010, when the markets were back to being very close to pre-crash levels.
Recall that we now have 152,000 shares. So, if the market gets back to its original level, of $10/share, our portfolio is now worth $1.52-million. We have just turned your $1-million into $1.52-million.
Great, right? Absolutely. But there is always more to do. We are going to flex your plan AGAIN, by putting $380,000 ($1.52-million/4) into each of those four categories – Canadian Equities, Foreign Equities, Balanced Equities and Fixed Income – and wait for the markets to correct again.
What is the obvious conclusion? ALWAYS buy when the market goes down by FLEXING your investments.
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Business owners: want to see a live illustration of this secret and the 5 other big secrets? And get some great bonuses? Just watch my new MasterClass. Here’s the link: https://bit.ly/35tRMZY
John Moakler, BMath, CFP, CLU
President and Senior Executive Financial Planner
Moakler Wealth Management
info@moaklerwealthmanagement.com
1 416 840 8544