So you build up your nest-egg and are in a position to invest for the future. This is a milestone to celebrate! Not a milestone to fret about your savings! Yet many retail investors buy stocks based on hot tips from gurus and friends, and sometimes even on tips from people they can't stand. In fact, their investments are based on anything but their own research of the facts. To add insult to injury, retail investors buy when everybody else buys – often at market tops - and sell by the time the market has crashed. They are so scared of going against the crowd, they sell along with everyone else with as result the disappearance of most of their savings.
I know, not selling at market lows is hard to resist. I am scared and wonder whether to give in and sell at those times - but by now I know better. Some companies are obvious duds and should have been sold right away when it was obvious they’re in trouble; others are less clear candidates for selling; and others went down just because the entire market did and have prospects for growth and renewed profit once the economy turns back to normal. Which one is which? Stop fretting - things will work out, so enjoy your net worth and go skiing instead!
I am using stop losses though. When a stock is down 25% from its most recent stock market high or from its purchase price – whichever comes first- just sell. That way you can outwait the down turn with cash for that perfect opportunity. Sometimes, the market turns around just after you sell and that may be painful but more often than not, the market continuous to drop. Even losses during corrections or during the mini-corrections we currently experience (apart from the commodities sector), losses of 10% can be painful; but chances are that the market turns around and continues the bull market. That is the difference between a 10% and a 25% drop is value!
Since most stock pickers, historically – not just during the last few months -, do not outperform the overall market, keep a significant portion of your stock investment in market index ETFs as discussed in earlier posts. Starting investors should keep all their money in those ETFs until they feel confident to buy a share of the ownership of individual companies after research, after soul searching and only at a good price. The latter is the same when you buy a new fridge, a new car, a house or… stocks!
If you buy quality companies and ETFs, chances are very good that after the black mood of the markets reverts or the recession blows over, your portfolio recovers and then some. After all very few stock markets go to zero and good, sound companies seldom go broke. Either way, if you did not sell during these down times, your portfolio will recover and resume making profits. In the meantime, you may have used new money to buy during the downturn some more investments at rock bottom prices.
So really, it is not healthy to follow BNN and stock prices every day. It is better to go out and enjoy life rather than sour over the schizophrenic markets. It is tough not to get sucked in. But really, other than waiting it out and not panicking, there is not a lot an investor can do. One thing makes me usually happy during those dark times – collecting dividends and other income.
This year has started on a sour note, but similar to the fact that you don’t check the price of your house everyday neither should you worry about the stock market and certainly don't worry every day.