Stock Markets Are Down. Should You Buy, Sell, or Panic?
Recently the stock market has been on a roller coaster ride, the markets go down, up and then down again. Should you buy/sell your investments (stocks, mutual funds, ETFs, bonds) or panic? Don’t panic! In the short-term markets fluctuate, this is normal.
Here what you should do…. Don’t panic, it’s not the end of the world, though the news media may want you to think otherwise. Remember bad news sells more papers, and increases TV news ratings. The news media lives off of advertising (radio, tv, paper, online), so it is in their best interest to publish headlines like:
“Debt crisis, will destroy economy”
“Government may run out of money in a week!”
“Depression heading our way!”
“Cost of living too high, another recession may follow”
“Shares plunge as bankruptcy fears escalate”
Remain calm, and filter out all the media noise. The economy will continue, history is full of recessions, wars, conflicts, and bankruptcies. As long as you’ve invested in quality companies when they were undervalued, in the long-run your investments will do fine. What about selling your investments now? Selling when markets are low is exactly the wrong time to get rid of your quality investments. It’s funny the stock market is the only place in the world where people buy more when pricing are rising and start to sell when prices are dropping.
Remember you want to buy low and sell high. Do not sell when markets are low, because you will incur losses. You really only lose money or make money when you sell. Holding on to a stock when its share price has dropped 10% does not cost you anything, if you don’t sell. There is a big difference between losses on paper and actual losses. Should you be buying investments then? That depends on what you buy. It is important to buy quality stocks when they are undervalued. Not all stocks will be undervalued when markets decline. Focus on profitable companies, market leaders, and companies with a long-term history of paying increasing dividends.
Watch my free webinar to learn when a company is undervalued. Stick to the value investing strategy (buy quality companies when they are undervalued), don’t jump from one strategy to the next, and avoid the media noise, and you will do very well for yourself.
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4 comments
Nice post.
I think an investor's behavior during times of market volatility is often tied to the asset allocation they have assigned within the way their overall portfolio is structured.
For example, if an investor has 100% of his or her money in small-cap stocks, they're going to be in for quite a surprise when the market swings.
With a properly structured portfolio, one in which has a sufficient amount of safety, the investor can weather financial storms with rather ease and not get caught up with all of the emotion. I think investors can easily get overwhelmed under such conditions, and make a poor decision, such as panic and offload investments at a bad time.
Good point TWC! Asset allocation is key, I teach my students to select large cap, recession-proof companies that pay solid dividends. Most companies in my portfolio have been paying dividends for more than 50 years, some have even been paying for over 100 years. These types of companies allow investors to weather the storm, and we will continue to get storms in the future.
The stock maket is a tasty way to get your hands on some money however when the economy breaks down. Everybody looses there way and panics. for example. If the was a large shortage in chickens everyone would panic becuase chickens are loved by most people as is money.
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