Volatility in the Stock Market
On December 20th, 2018, the S&P 500 was down 8.5% for the year.
Now there are a lot of reasons that the market is down at this point in time:
Possible Government shutdown tomorrow
Tariff wars between countries
Fed raising the fed rate by .25%
Lower corporate taxes
I’m not here to give you my opinion on why the stock market is down, I’ll leave that to the smarter people on TV who are always giving their opinion. Instead, we’re going to focus on what everyone is feeling with the stock market down so much.
“Do I sell my positions in my stock or do I ride the wave down then back up?”
If you’ve read the professional advice of long-term successful investors they’ll tell you to ride the wave down and don’t sell your position. If you’ve listen to your heart and brain, it is telling you to sell right now because there is going to be a death spiral of the stock market. So what do you do?
Here are three things you should be reminded in this time of volatility:
1) If you have a diversified and well balanced portfolio, you’ll be okay in the long-term.
The stock market will ebb and flow over the long haul. There are times the market will decline and there will be times that the market will rise. A well balance portfolio should be able to weather the storm for the long-haul. By weathering I don’t mean that it isn’t losing money, it will (see my second piece of knowledge), but when you have a diversified portfolio, you’re not all-in with one sector or one type of security. You’re in everything.
How do you keep a well balanced portfolio? Having index funds versus individual stocks will give you a diversified portfolio. Many index funds that cover different security types and sectors will give you the well balance portfolio you need.
Individual stocks are riskier when it comes to investing because you’re counting on just one company instead of many and although there is greater opportunities for greater returns, it also means taking on greater risk.
2) You haven’t lost money yet unless you sold your securities.
In accounting, we don’t necessarily consider something a loss unless we’ve actually lost it. If we still have something, we haven’t lost it at all. This is the same for securities. You own a share of an index fund, mutual fund, or an individual stock. Unless you sell it or the company or fund goes bankrupt, you haven’t lost anything. This is called the paper loss, it ain’t actual losses.
If you can put your heart aside and understand tip number 1 and 3, then you’ve got nothing to worry about. A loss is only a loss when you actually sell your securities.
So do yourself a favor, unless you don’t have a diversified and well balanced portfolio, stick to your plan as you had it in the good times.
3) It’s time to buy more stock so you can lower your Dollar Average Costing number.
If you don’t know what that is, head to my YouTube channel and checkout my discussion on Dollar Average Costing. When the stock market is down like this, experienced investors believe this is the time when the “stocks are on sale.” In other words, this is where they make their money. Since the stock market has taken a beating, experienced investors know that if they go in now, they can make more money than if they didn’t take advantage of the sale.
Take a look at our S&P 500 Investing Challenges and our $150 Investing Challenge, they are both based on the Dollar Average Costing and at the time of this blog post, we’re in the gutter (portfolio wise), but we’re still buying stocks on our original timeline we set. By doing this, we’re effectively lowering our average cost for the securities that make up both investing challenges.
If your heart says that it can’t do it because you’re losing money, then ladder in your investments. This means instead of buying a huge lump sum, break it up into small bits and make 5 - 10 transactions over a 2 month period. This reduces the risk of even greater slump, but also gives you piece of mind when it comes to investing more money into the market that is tanking.
If you’ve read Tony Robbins’ Unshakeable, you know that this stuff happens. The economy expands and contracts, the stock markets goes up and down, investor confidence is all over the place. Your job is to try to wait it out and make good decisions while the entire world is getting out of the securities market. If history showed us anything, it’s that we’re going to bounce back, the problem is, we just don’t know when.