How To PROFIT From A Stock Market Crash (Genius Strategy)

When is the best time to buy stocks during a market crash? Should you buy after a 10% drop? Well, if you do that, you risk buying too early and missing out on lower prices if the market keeps falling. Should you wait for a 30% drop? If you do that, you risk waiting for prices that never come and missing out on great investment times. This is a problem that has plagued investors for years, and I found a simple but brilliant cash management strategy that solves both of these problems in one go. If you follow it, it ensures you get in at good prices without having to worry about timing the market bottom. In this video, I'll show you exactly what the strategy is, cover all of the benefits of using it, and tactically take you exactly through how to implement it. So what is this cash management strategy I'm talking about? Well, it was created by Morgan Housel, the author of the famous book, The Psychology of Money. In a 2013 article he wrote for The Motley Fool, he laid out his simple plan for how he was gonna invest his cash during a market crash. And in typical Morgan Housel fashion, it was a very well thought out solution that was elegant and simple. So here's the table that Morgan presented in that article. What Morgan proposed was a trigger-based investment system where he would put the cash that he had set aside for investment to work at gradually greater numbers as the market continued to fall. Moreover, he also set realistic expectations for himself for how often he expected to be able to use each of these trigger points. What I love about this simple table is that each time the market drops to a certain number, it sets off a new investment amount. And since it's systematic, it removes the guesswork and the need to go all in at one specific time. It's also realistic since it's based on actual market data. Now I made an ebook that has this visual in it. If you want a free copy, there's a link in the video description below. But let's walk through each of the trigger points that Morgan has laid out here so we can understand how it works tactically. So the first one starts when the market falls from a recent high by 10%. For every $1,000 in cash that Morgan had set aside to invest, he would invest 10% of it. So of that theoretical $1,000, he would invest $100. And the frequency of this occurring actually happens about every 11 months or so, so about once per year. We can see this in action by looking at this table, which is made by JP Morgan Asset Management. What it shows is the returns by year of the S&P 500. But if you look at the red dots below the screen, you'll actually see the intra-year drops that the index experienced during those years. What we can learn from this table is that the market drops an average of about 14% intra-year, even during years when the overall stock market went up. Now getting back to Morgan's plan, we can clearly see that there would have been dozens of times during the last 45 years when this initial investment amount would have been triggered. This would allow Morgan to continually add cash that he had set aside for investment in a systematic way to take advantage of short-term market drops. Now the next trigger point on this table would be when the market falls by 15%. Here, Morgan would invest $220 for every $1,000 in cash he had set aside into the market. This would allow him to invest even more capital to take advantage of that temporary weakness. Morgan points out that declines of 15% or more happen in the S&P 500 about once every two years or so. And if you look back historically, that's what we would see. During each of these years in the last 45 years, it would have triggered that $220 investment. Now the next time Morgan would add significantly, we win the market falls by a full 20% from its recent high. This would signify the starting of an actual bear market. Morgan would invest $300 of his $1,000 in cash that he had set aside to take advantage of the big pullback. Morgan points out that this occurs roughly once every four years. If you look back at the last 45 years of S&P 500 data, we would see that this trigger point would be hit roughly nine times. And by investing that $300, it would allow for a significant amount of capital to be put in to take advantage of bear markets. Next major investment point would be when the market falls by a full 30% from its recent high. Notice that Morgan still has capital set aside to invest for this time period, which you can expect to happen about once every decade or so. If you were to make investments during these times, you would be picking up a substantial amount of stock at rock bottom prices. And the final two trigger points are when the market falls by 40% or 50%, which are extremely rare occurrences, but they do happen a couple of times a century. If you look back at the last 45 years, there would only be one time period, 2008, when this trigger point would have been set. What's the benefit of following a systematic plan like this? Well, first off, the dollar amounts are preset ahead of time, which means you don't have to do any thinking in the moment. Second, I like the scaling nature of these investments. As the market continues to drop, Morgan still has cash set aside to continue investing, although the lion's share of the investments happens up front in more frequent pullbacks. Third, with this strategy, there's no need for you to pick the bottom. You don't need to guess about when the stock market will actually bottom since you're scaling in over time. And then finally, following this plan provides a lot of psychological relief. Because you are never going all in with your investment and you still have cash set aside to take advantage of the really rare, but really big pullbacks, it's much easier for your brain to deal with the volatility of the market. Now, to get tactical for a second, how do you figure out how much the market has fallen from a recent high? Well, the tool that I use to figure that out is FinChat, which is one of our channel sponsors, even though they're not sponsoring this video. Let me show you how to do that. So I just simply enter the ticker for the S&P 500 fund directly into FinChat. And by default, it'll pull up a chart that shows the index's performance. But if I just go to a three-month period for the index, and then I change the dropdown to drawdown by comparison, what this will show me is how far off the recent high the index is in percentage terms. So by using this drawdown feature, it makes it very easy to tell how far the market is down off of its recent high. Now, whether or not you agree with the exact numbers put in this system is irrelevant. You can easily customize it to your situation. But what do you think? I would love to know your thoughts. Is this a good strategy for investing in the market? Or have you come up with something better? Let me know in the comments section below. And if you want a free copy of a visual that I made that contains the details of this cash management strategy, simply visit longtermmindset.co backslash crash, or click the link in the video description. Well, thanks for watching. If you enjoyed this video, there's 100% chance you'll like watching this video next.