Remember “buy low, sell high?” It’s low
The stock market has gone down… again. Hey, we feel your pain. And it’s at times like these that you might question why the fun of positive returns ever has to end. “Why can’t the bull market just keep going up forever?”
Hey, nobody likes to see their return take a dip. But the upside of a down market should be just as obvious to you, the investor. You know the expression “buy low, sell high?” Well, it’s low right now.
(Or, for you Warren Buffett fans, there’s the old saw: “Be fearful when others are greedy and greedy when others are fearful.” Well, others are fearful right now, so… you get the idea.)
That’s why cashing out investments, pulling the covers over your head and hiding until everything is back to normal is a very bad plan. Now’s the time to be bold and hold.
Avoid locking in losses. And even better: now you can invest when the market is having a sale.
If you’re a long-term investor, times like these are a golden opportunity. Let’s revisit some “investing first principles.”
What exactly is market volatility? (And what’s happening right now?)
Keep in mind, the trouble you’re seeing in the market is totally normal. Markets go up. Markets go down. There’s an investment cycle.
You know that when investments go down, this basically comes down to a drop in confidence. Let’s take stocks, for instance. The stock price represents the value of a company. If we see news that makes us think companies are going to become money losers, that value goes down.
Facebook gets sued over a scandal, so Facebook stock goes down. There’s an oil glut, which means the price of oil goes down, so energy companies will see lower profit margins and their shares go down. You get the picture.
We have a pretty good idea of what’s contributing to market volatility right now (oil’s price zig-zags, trade war worries, confusion over Brexit, etc). But in the bigger picture, you could argue that the market is down because it almost had nowhere to go but down.
We were riding high for so long, on a magical 10-year long bull run. Analysts had warned for years that many stocks were overpriced… and they kept going up.
You can see this trend play out here:
So, what we’re seeing is that according to CNN’s fear vs. greed index, fear is up, confidence is down… and the stock market does what it does.
The market is hurting right now… but you’re investing for the long-term (aren’t you?)
When the market is bouncing up and down, or mostly down, fear can take over. And when people are afraid, they want to take action to make that big, scary thing go away.
But when you let emotion rule your decision-making process, you make big, scary mistakes… like cashing out when your investments are at their lowest point.
That’s the opposite of“buy low, sell high” — it’s“buy high, sell low.” Mistakes like these can destroy decades worth of returns.
In fact, let’s run the numbers.
Fearful investing. What happens when you cash out your investment at the low point of the market
Let’s say that this year, you got an unexpected windfall from a rich uncle who left you $100,000 from his will.
You put it all into the S&P500 Index at the height of the market. Then you just left it there. But this week, you’re scared… so you cash out. But here’s the result: you would now have $84,190.
So, if you sold now, over $15,000 of the $100,000 would be lost because of an investment decision based on fear.
Fearful investing Part 2. Investing in a low-risk GIC when it gets scary
Selling when markets are at a low is a mistake. But even worse, some investors will top that mistake off with a second one: putting their money into low-risk investments like a GIC.
So, you’ve got the $84,000 and change left over from the $100,000 that your uncle left you. You pulled your investments out and now you invest it into a 5 year GIC at 3.5%.
At that rate of return, 5 years from now you would only have $100,501.36. You would be back to where you started. That doesn’t sound too bad, right? Well, it is bad. And you could have done a lot better.
How do we know that? We can’t predict the future, but we can take a closer look at the past.
Bull markets often charge hot on the heels of bear markets, with a significant amount of the market recovery happening in the first few months of a rally.
In November 2008, here’s what it would look like after 5 years if you stayed the course with the S&P500 vs. running for the exits with a 5 Year GIC:
So, what should you do instead?
When the market is in retreat, press your advantage
The first smart thing to do at times like these? Stay invested. Don’t cash out.
As long as you’re still invested, you technically haven’t lost anything… because your depressed investment can still go back up. When you move to cash… well, it’s game over. You just locked in your loss. When the market goes back up (and it will go back up eventually) you’ll miss out.
The second smart thing you could do? Invest more.
I know what you’re thinking: “what if the market goes down even more?”
Well, it did go down more… a lot more, in 2008. We all remember that. The S&P 500 fell over 38 percent percent, which was its worst yearly percentage loss, far more than we’ve seen in recent weeks. If we’re seeing discomfort right now, back then, there was serious panic. And yet… even if you had invested in the S&P500 just before the crisis started (not after… before!), you could have wound up with a return of 7.8 percent, annualized, including dividends. Because after the downward slide, the market recovered.
So, the market could go down even more. But investing more now is still the smart, less-risky move.”
Why would I say that? Because if you wait, that means you’re timing the market, waiting for the perfect moment to buy in (not just a good moment). That’s really, really hard to do, even for professional investment managers. It’s much harder for regular investors who only look at their dashboard every week, or every couple of months.
(In fact, that’s why we do regular rebalancing of our portfolios… because timing the market perfectly is virtually impossible. That’s what we do to diversify your investments to lower volatility and get consistent growth over time. The idea is to adjust your portfolio periodically to match your risk tolerance to minimize volatility — and as long as you stay invested, you don’t need to lift a finger.)
Don’t let perfect timing be the enemy of good timing when it comes to your money
You know the market has dropped. It’s been down for a while. But then, one day, maybe tomorrow, maybe next week, or next month — it will go up. But right now… right now, it’s like there’s a fire sale happening at the Investing Store. “Priced to clear! Any offer considered!”
An opportunity like that doesn’t come around every day. So, at the very least, hold on to what you’ve got. But you’re serious about growing your money, right? Don’t wait for the perfect time to invest. Invest when it’s a good time to invest.
Right now looks like that kind of time.