With crisis comes opportunity. This could be your chance to make amazing profits, writes The Motley Fool
With the fate of the European economy hanging in the balance, we may be on the verge of another extended downturn for the stock market. But instead of making the mistake that many investors made during the last financial crisis, you need to realise that with crisis comes opportunity — and you don't want to miss out on what could actually be your best chance to make amazing profits.
Remembering 2008
Today's crisis of confidence in Europe brings back plenty of memories of the global financial crisis (GFC). The market meltdown of 2008 and early 2009 challenged fundamental assumptions about the way the financial system worked and led to huge attempts at reform that we're all still struggling to complete today.
But along the way, the crisis gave investors some amazing opportunities for profit. Bank stocks at the epicentre of the crisis lost over 50 per cent of their value, but most of them bounced back sharply, producing big gains for investors who were courageous enough to jump in when no one else would.
Today, even after the horror run of recent weeks, Commonwealth Bank of Australia (ASX: CBA) Australia and New Zealand Banking Group (ASX: ANZ) trade well above where they did in early 2009. Some companies were effectively priced for failure, and the gains in companies like Forge Group Limited (ASX: FGE) Regis Resources Limited (ASX: RRL) and NRW Holdings Limited (ASX: NWH) have been truly phenomenal.
This too shall pass
Europe's problems are of a different flavor, obviously. The prospect of national governments facing financial insolvency is not one to be taken lightly.
Still, you have to ask yourself: Will even as huge a step as the abandonment of the euro currency cause so much chaos that business activity comes to a screeching halt entirely? Such huge consequences are unlikely. Rather, just as we went back to business after the financial crisis, so too will Europe likely emerge without huge disruptions to overall economic activity.
With investors punishing companies across the European continent as if businesses are going to stop functioning, there are already attractive bargains available — and more could emerge as the problems continue.
How to get ready
In order to make the most of this possible meltdown, you should be preparing right now. Here are a few things to keep in mind:
- Cash is king. You don't want to go overboard trying to time the market, but holding at least some money aside when sharemarket valuations are relatively high gives you more firepower when bargains come. Because downturns can last longer and go further than you'd ever think possible, don't be in a hurry to deploy all your spare cash right away.
- In any market plunge, some investments get hammered when they don't deserve it. For instance, during 2008's collapse, commodities like gold and silver suffered huge losses just when their potential value as a hedge against government irresponsibility was soaring. But after the crisis ended, reality set in — and metals started soaring again.
- Fear is the mindkiller. If you're going to invest in shares, you always have to be ready for tough periods like this. Rough patches separate good investors from great ones, and how you handle them can define your success or failure for years to come.
Your make-or-break chance
It's never easy to stick with your investing strategy when the bad news never seems to stop coming.
But if you handle situations like this the right way, you'll eventually see them as rare opportunities that give you your best chance to reach all your financial goals.
The hardest thing to do is to shift your mind-set away from the pervasive doom and gloom and keep your eye on the ball. But if you can, you'll be ready for meltdowns whenever they come.
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The death of shares has been greatly exaggerated
This article was originally published on Fool.com. It has been updated. Authorised by Bruce Jackson.
