Being a stock investor had been a relatively exciting ride until a couple of months ago. Until then, the stock market had been on an unprecedented upswing, barely being knocked off course since the bottom of the Great Recession in early 2009. Prior to this current turmoil, the market last underwent a bit of a correction from mid-2015 until early 2016 and had been on a tear until recently.
However, storm clouds have gathered and have been tossing the markets around for a couple of months now, with violent upswings and downswings in the prices of a number of stocks. At times like this, it’s important for investors of all levels of experience to put things into perspective, especially those of you who’ve only enjoyed a strong market since starting to invest within the past couple of years. Here are some thoughts and ideas to cling on to.
All storms come to an end
I described in another post how the stock market is like an ocean, but I also tend to liken it to the weather. In any case, I view it as having rhythms and cycles just like natural phenomena. Although the stock market is obviously not a natural phenomenon, it’s similar in that its behavior is unpredictable, including when the financial storms will happen and how long and severe they will last. Is this recent turmoil just the beginning of a financial hurricane, or will it soon pass like an intense afternoon thunderstorm on the prairie?
Whatever the case, is anybody able to accurately predict the future? Of course not. DON’T BELIEVE ANYBODY who claims to know what will happen! However, keep this bottom line in mind: like all storms, no matter how long or severe, this too shall pass and things will be better again; it’s simply a matter of when. During any sort of storm, it’s best to just take cover and not worry about the results. In the case of the stock market, history has shown that not long after a market storm – sometimes weeks, sometimes a year or two – it is higher than it was before the storm. A look at the long-term performance of the S&P 500 confirms this in every instance.
You must think and act long term
How do you possibly take cover and not worry as a stock investor when all around seems like a whirlwind? The key is to develop a long-term mindset. If you do, then you realize that selling anything at this point is foolish, especially if you’ve recently opened a starting position in a particular stock. If you’re bothered that you’ve already lost ten or twenty percent in a holding and you think that you need to sell and wait for a lower buying price, what if that doesn’t happen and you miss the lower price before it goes up again? And if it does go even lower, what will happen if you buy and then another big dip occurs? Will you keep trying to run from the storm clouds and lose even more money in the process instead of taking cover?
Corrective action – buying and selling – must only occur during a calm period, not during a storm, in order to prepare for a storm. During a storm, you can panic and lose perspective. It’s like having practices before a game; the game should be about the testing of a strategy, not about developing one. Corrective action can only effectively occur after a game, when you’re aren’t in a panic.
The best strategy during a stock market storm is to hold on, to take cover, to literally do nothing until after the storm passes. In my case, holding on over the good times of these past few years has caused some of my best performers to produce returns of over 300 percent as of right now (even higher before this recent dip!). Even if this current storm knocks, say, thirty percent off of these stocks, I’m still miles ahead because I didn’t panic and sell due to lesser dips over the past few years when I was tempted at times to panic and sell. Instead, I held on and weathered those little storms and now I’m much better prepared for a big storm.
This has also taught me the habit of holding on. This habit needs to be developed and it needs to become a discipline. If you don’t build the habit of holding on when times are good, then you won’t be able to hold on when times are bad, and vice-versa.
Ignore the bad news
Even when times are good and the best stocks are surging steadily upward, there are always the “bears” bemoaning something: geopolitical tensions, cyber attacks, rising inflation, and so on – and ultimately the next market crash, or the “big one,” due to such things. As a less-experienced investor, before I realized the power of a long-term mindset (learn whatever you can about this from the likes of Warren Buffett and The Motley Fool!), I was so easily shaken by any sort of bad news. But I’ve learned at times like these to simply do my best to ignore it. I don’t check my Stocks app as often, for example. I ignore most of the bad financial headlines, focusing only on news about my individual stocks. I also refer to my investing journal, where I’ve recorded the reasons why I bought particular stocks in the first place. It provides me with reminders during times like these about why I need to hold on.
If a company is still performing strong and a dip is only the result of external factors like what I’ve mentioned above (geopolitical tensions, cyber attacks, etc.), then a rebound will happen quickly once that news is soon old news. Do I seriously want to protect myself from a ten-percent dip by selling when that stock could surge by at least that much before I have a chance to buy in again? Instead of the risk of missing out on future gains, I’d rather run the risk of stomaching a temporary loss.
A loss on paper is not an actual loss!
Speaking of losing, are you really losing money if a stock’s price dips below what you bought it for, even by something crazy like fifty percent? Not until you actually sell it! Until then, your loss is only theoretical; it’s only ‘on paper’ and not an actual loss. This is perhaps the most important thing to keep in mind at a time like this. Unless you absolutely need to sell, ride out the storm until the stock’s price is higher than what you bought it for. The best way to ensure this is to hold on for as long as you can.
A long-term investor should not buy any stock unless he plans to hold it for at least three to five years. You should never invest any money that you might need before that time. The only time to ever sell (unless you have a critical family/financial emergency) is if some really bad company-specific news comes out that causes the stock price to dip around fifteen to twenty percent below what you paid (as one rule-of-thumb). At this point, it would be wise to get out if you perceive that this bad news will drive the stock price even lower and for a long time. (Frankly, in my experience, if it dips fifteen to twenty percent over the course of several months, that’s a red flag that should not be ignored!)
Otherwise, if a stock is strong (no bad news, great financials, solid growth, etc.) and only having the odd hiccup in price here and there, holding onto it for as long as possible is the only statistically proven way to ‘smooth out the bumps’ as it trends ever higher in price. Having a nice cushion by the time of the next dip or crash is nice feeling!
I hope that I’ve encouraged you to hold on at all costs during this stormy time in the market. As with all tough times, stronger character and success only result for those who choose to hold on and, more importantly, learn from what happens so that they can be even better prepared for the next storm.
If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing? It could become one of the most beneficial 30-minute reads of your life.
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To new beginnings!