3 Investing Rules to Follow in 2020

There’s been a lot of discussions on whether the market has been overheated or not. Most say we’re on the verge of another bubble to burst, others say it will take 3-5 more years for things to stabilize again. That’s why I’ve put together a small investing rules’ guide for 2020.

Historically, market crashes have happened over every 9-12 years. Since the last one was in 2009, I’d say we’re approaching another one soon. Just looking at this graph motivates me to follow some principles I set myself for 2020. 

Stock market overview Dow Jones market crash history
Source: Kingdom Economics

1. Cash is King

The smartest thing you can do if you’re not sure how the market is going to behave, is hold on to your cash. And I’m not talking about keeping hundreds of thousands of euros/dollars in cash, as you should (almost) never have huge amounts in cash because the inflation will eat it. But instead, have a good amount ready that would allow you to buy something for cheap if the prices drop.

I know a couple of people who made some really great investments during the last market crash, as they had cash. They were able to buy cheap real estate, cheap stocks, and even cheap cars. Yes, cars! Let me explain.

If things take a downturn, people usually can’t keep up with expensive car lease payments and are forced to sell their car. Since the market is down, very few people are interested in buying an expensive car. This leaves you with an opportunity to buy a great car at a discounted price. Not that I really care too much about the car I drive (jokes on me, we don’t even own a car), but I wouldn’t say no to a heavily discounted Tesla.

Pug and cash

2. Invest only in Dividend Kings and Aristocrats.

I’m all pro “boring investing”, meaning that I’m not interested in extremely high returns (as it always also means high-risk) nor am I interested in extremely low returns. The worst time to gamble is during the bull market, which we’re currently in. Stock prices are expensive and have been, in most cases, climbing up straight for the past 10 years. 

With dividend kings and aristocrats, I can at least be sure that I’ll (almost) always have a reasonable dividend income, no matter if the market is going to crash or not. Dividend kings and aristocrats have been paying out dividends for 25 or 50 years, respectively. Meaning that they’ve been through several financial crises.

So, if I’m buying any shares from the stock market in 2020, it will only be shares of companies that have survived all sorts of economic downturns. 

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3. Have a Massive Emergency Fund

This investing rule relates to the first point, but you need to be prepared for the worst case scenario. Think what will happen if you lose your job, if you and your spouse lose your job, and you also get sick at the same time, so you can’t even apply for jobs, even if you wanted do. This is a highly unlikely scenario, but you want to be prepared. 

Most people don’t have enough money to survive 3 months without a job. Try to create an emergency fund that would allow you to spend 6-8 months without working. To do that, you need to calculate your monthly expenses and multiply it by 6. This is the sum of money you’ll need to set aside to basically not end up on the streets if things go bad. 

If you don’t have any specific skills, or you know that there’s a high competition in your industry, set aside even more money. Being prepared for the worst case scenarios will help you immensely. Even if you don’t have to use your emergency fund during the crisis, you can invest SOME of it following the step number 2. 

Office show emergency finance

These are the main 3 investing rules I’m following in 2020. Even though the worst case scenario will very likely not happen, I can go to bed in peace every day, knowing that I won’t become homeless if things go bad. 

Have you set main investing rules for 2020? If yes, what are they? If not, why not?