MaineBusiness.com

Stock Market Have You Down? It Shouldn’t

Over the past month, a lot of investors have been getting scared about the downturn in the market, wondering if this is just another minor market blip or the sign of a more severe decline in the future. Some thoughts:

1.) You Never Have Lost Money Unless You Actually Sell: It’s amazing how some people fret about losing money in the market when they don’t even plan to tap into their funds for a very long time. If you planned to use these funds 5, 10, 20 or even 30 years from now, why are you beating yourself up about it? If you are doing things right, markets do come back from losses. If you needed the funds within the next 3-5 years, those funds shouldn’t have been in stocks to begin with.

2.) Downward Movements are Normal, Natural and Part of Why We Are Rewarded Over the Long Haul: Since 1979, the S&P 500 has lost over 5% in one month on average once every 13 months. Our last drop of this sort happened during the end of last spring, so I guess we were due. The recovery since 2002 has also been one of the least volatile periods in stock market history; that was certainly going to change. Many investors tend not to recognize that if this risk wasn’t inherent in owning stocks, in turn we wouldn’t be rewarded as well. If there were no risk of loss with stocks, they wouldn’t provide any higher returns than what you can make in a bank account. Think about it.

3.) Don’t Waste Your Time With Financial Pornography: Are you getting those alarming e-mails telling us the market is going down, watching guests on CNBC go though the mindless dialogue of their take on the market at that moment (which can change that very next moment) or watch the evening news in their latest creation of the “crisis-du-jour?” All I have to say is stop wasting your time and certainly don’t act on this. Financial pornography is information we get on a daily basis that only leads to short-term thinking and focuses on timing (is it time to buy or sell) and selection (what investment is going to do good or bad at this time), which provides very little in returns over the long-haul. Why pay attention to things we can’t control that do very little for long-term results. In the end this information is meaningless noise.

4.) When Markets Go Down I Don’t Get Nervous, I Get Downright Giddy: The beauty of a good investing discipline is that it’s counterintuitive in nature. When stocks go down, I don’t worry or think about heading for the exits, I think opportunity. Now I can buy stocks at la discount to what they were only a month or so ago. With the knowledge of the amount I (or my clients) can or can’t afford to risk and the knowledge of my (or my clients) stated risk tolerance, this is opportunity, not a negative. Rebalancing a portfolio is a wonderful way to amplify returns and lower risk over time. If more people bought stocks like they buy more consumer goods when the local department store has a huge sale, they would do much better.

Will the market go lower? Are we going into a recession? When will the bottom be? I can’t tell you this, nor can anyone else. But I can tell you, with a steady investment discipline and long term vision, the current mood of “Mr. Market” shouldn’t get in your way. If you are doing things right, what happens today, tomorrow or in the short-run has no bearing on your long term results. For those who are interested, feel free to read the more detailed synopsis of this, Is the Bull Market Over? on my website.