☕️ Sunday Coffee: When the market crash

Short guidance in case of emergency

Sep 08, 2024

At MaxDividends, we don’t try to predict the market. But one thing’s for sure—there will be another market crash at some point

It might not happen this year or next (or maybe it will…), but eventually, it'll happen. That’s just how the markets work.

The last big crash was in 2020 with COVID and the lockdowns. Between February 19 and March 23, 2020, the S&P 500 (SPY) dropped a brutal 33.7%. The market lost about a third of its value in just over a month.

But here’s the takeaway from that COVID crash and the fast recovery after it: you don’t need to fear market crashes. In fact, you can use them to your advantage.

Let me walk you through 4 steps on how to profit from market crashes:

Step 1: Don’t Panic Sell

The biggest mistake most investors make is panic selling when the market tanks. People get spooked and move into "safer" investments like bonds, which often locks in their losses.

That’s how impatient investors lose money to the ones who stay cool and buy during recessions. Don’t be the one transferring your wealth to someone more patient.

Step 2: Think In Terms of Income, Not Value

There’s a smarter way to invest that makes market dips an opportunity rather than something to worry about.

Stop thinking "My portfolio is worth $1,000,000" and start thinking "My portfolio brings in $40,000 in annual income."

(That’s a 4% dividend yield, by the way.)

Focusing on income instead of portfolio value means your investments are doing something for you, even when market prices fluctuate. What really matters is the steady, or even growing, income from dividends.

Here’s an example:

Aflac’s (AFL) stock dropped by over 70% during the 2008 crash. But guess what? They raised their dividend from $0.12 to $0.14 a share.

While the market was freaking out, Aflac was quietly paying more dividends. If you were focused on income, you wouldn’t have cared much about the price drop. But those who panicked and sold? They locked in their losses.

Step 3: Buy When Everyone Else is Selling

Now it gets fun...

If you're focused on income, market crashes become a buying opportunity.

Take Aflac again. Before the 2008 crash, its yield was below 2%. When the market tanked, its yield briefly shot up over 7%. Same company, but just at a much lower price.

Crashes are like deep discount sales on great companies.

"Be fearful when others are greedy and greedy when others are fearful." - Warren Buffett

You can take advantage of fire sale prices during crashes by selling overvalued stocks and reinvesting in undervalued ones, or just reinvesting your dividend income when prices drop.

When people are panic selling, smart investors are on the other side, picking up great businesses at bargain prices.

Step 4: Find High-Quality Dividend Growth Stocks

Once you’ve got that income-focused mindset, the next step is finding top-quality dividend growth stocks to build your portfolio.

That’s where MaxDividends comes in.

Predictability in important things is the foundation of peace of mind. Peace of mind is the basis of financial well-being. MaxDividends is all about peace of mind.

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Sunday Coffee is a column where I share insights on stock investing and the philosophy of long-term investment, discuss intriguing thoughts and ideas that could benefit you.

All Sunday Coffee posts you can find here

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