5 Rules For Making Money In Market Crashes

Dear Reader,

While many investors do not believe the 20-10-5 trend exists, there are other investors who do pay attention to it. 

Simply put, this theory states that the stock market is favorable for a period of 20 years. 

When the 20 years are over, the market crashes and for the next 10 years, commodities such as oil, gold, silver, real estate, oil, gas, and soybeans rise in value. 

The 5 of the 20-10-5 cycle means that every 5 years some tragedy happens, such as the 1987 stock market crash or September 11, 2001.

Rich dad said, “The stock market dominates the investment market for a period of 20 years. As the twentieth year approaches, the possibility of a market crash increases. After the crash, the stock market tends to stay down for ten years. During the ten years the stock market is down, commodities such as gold, silver, oil, and property dominate the investment world. And every five years, there is some kind of major disaster.”

Although I would not set my clock by this cycle, awareness of the cycle serves a useful purpose—to constantly remind me that markets change. It also reminds me to look for investment opportunities in different markets, rather than keep going back to a well that is dry.

Millions of investors lost money in the stock market between 2000 and 2003 because the 20-year cycle of stocks came to an end. Rather than follow the 20-10-5 cycle, many investors continued to sit around waiting in the stock market, rather than moving on to the commodities market. It is reported that in 1996, Warren Buffett stopped actively investing in the stock market and quietly moved into the commodities market, investing in hard assets such as silver. In 1996, I too moved out of the stock market and moved into the oil and gold markets. Why? Because market cycles were changing. Just as the moon changes phases, so does any market.

Where Opportunities Live

Market crashes can be the best time to buy because people are so panicked and focused on selling that they’re far more likely to make you a better deal. Kim and I witnessed this first-hand in 1991, when we moved to Phoenix, Ariz., and began buying up properties left and right. Amateur investors wanted out of their financial commitments so badly, that they were actually calling us and offering to pay us to take their properties off their hands. We happily agreed and definitely got the last laugh: We made so much money during this period of time, that we were able to retire by 1994.

Although a crash is my favorite time to buy, the market’s immense pessimism also makes it a tough time to do so. Your family and friends, possibly even your financial advisor, will think you’re absolutely crazy and try to prevent you from “making a big mistake.” I remember when we bought gold at $275 an ounce in the late 1990s. The so-called experts were eschewing gold in favor of high-tech and dot-com stocks back then. But we knew we were getting an incredible value. Today, with gold above $1,300 an ounce, I’d say we certainly made the right call. Thankfully we trusted our instincts and followed the strategy that has worked for us time and time again.

People will also be lined up warning that “investing is risky.” However, the important detail to note is that not everyone defines “investing” the same way. Many amateur investors bought into the real estate market when it was hot, prices were soaring, and they invested in the hope that home values would keep going up and up. They probably had plans to flip the property and make a quick $50k. Investing for the purpose of capital gains instead of cash flow is the very definition of risky.

Experienced investors, like Kim and I, understand the fundamentals of real estate investing. Investing doesn’t have to be a gamble. Good cash-flowing investments are based on having a solid financial education. Knowing and following the fundamentals takes much of the risk out of investing. Sure, there’s always some element of risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.

Kim and I continue to invest even though the threat of another bubble keeps looming. But we’re more like hibernating bears, waiting for the party to end. 

I know most people fear a crash of the stock and real estate markets, but a downturn can be a great opportunity to prosper—which is the opposite of what most people have been taught their whole life. 

It happened for Kim and me in 2007 when that market came tumbling down in real estate, that’s when we made most of our money. It is the best time to get rich.

Making Money In Bull And Bear Markets

Markets go up and markets also crash. The key is to be prepared for any market, whether up or down.

  1. Know your position 

The sad reality is that most people don’t even know what their retirement money is invested in. The money gets pulled out of a check, goes to a magical place called a managed investment account, and is moved around by a wizard called a financial manager.

The first step to success in any market is obvious enough, but too often ignored. Know what your money is invested in!

  1. Know how you’ll perform

Once you understand what your money is invested in, you need to understand how those investments will perform in a given market. For instance, if interest rates are hiked substantially, there’s a good chance that stocks and bonds will fall—and these stocks make up most investors’ retirement accounts.

Therefore, in such a market, it may be time to invest in real estate before interest rates go higher.

  1. Get educated

This means that you can’t just take advice about the market, you have to educate yourself so you can see what’s coming and have time to prepare.

If you don’t plan on investing in financial education, then, by all means, keep your money in your 401(k) and let it sit there. It’s safer than moving money without the knowledge of how or why. But if you want to be prepared to make money in any market, you need to understand how to make that money work for you.

  1. Slowly pare back your risk 

With the proper education, you can see better where the markets are going, how your current asset mix will perform in the coming markets, and how much risk you have. This allows you to make the proper adjustments to minimize your risk and take positions that will perform well whether the market is going up or down. And it leads us to the final point.

  1. Buy in pairs

Professional investors always buy in pairs. One position is for growth, and the other is for protection. So for instance, if you’re heavily invested in the stock market and paper assets, you want to take an insurance stake in precious metals or commodities. If you buy real estate, you want to also buy insurance for that real estate. The list can go on and on. This, of course, takes financial education, but the investment is worth it.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

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