The last few weeks have been really good for us investors, but the good times can suddenly turn dark again. You haven’t forgotten about the turbulent December already?
Anyway, I do these two things when the markets are harsh!
1. Write down your feelings
Make yourself some coffee, sit down at your desk and write about how you feel about what is happening in the market.
Write freely, truly and honest to yourself. If you have a bad feeling about the market, write it down.
Do you want to withdraw your portfolio to cash? Write it down.
If you regret not investing in real estate instead, write it down.
Basically write down whatever you feel about the markets in this moment.
Set a date on the paper / word-file and archivate it. And don’t touch your portfolio. Let it be as it is.
When you read about your thoughts 6 months from now you’ll be shocked you felt this way.
Do you even remember your own feelings in february 2018 when the market dropped 10 %? Or the feelings you had in december 2018 when the market acted like crazy?
Your brain will try to convince you that you “really” didn’t feel everything you wrote, because things will have calmed down. Corrections and bear markets are a feature, not a bug of the stock market.
The main point with this exercise is to write down your feelings, so that the next time the market tanks, you can go back and read your thoughts about earlier events. It will be really calming to read.
I wrote this on Christmas Eve when the S & P was down more than 2,5 %: “I hate the stock market! Why didn’t I just leave my money in the bank? My portfolio is down around – 7 % overall for 2018, and I thought that + 7 % was the norm. I realize that I didn’t understand how voltatile the stock market could be. Right now, I just want to sell, but I know it’s a dumb thing to do. So I’ll just stick with it. Mr. Market; please deliver better than this for 2019. That’s my only wish for Christmas this year.”
When I look at what I wrote now, I can’t even remember that I felt it so harsh that Christmas Eve. I definitely recommend this exercise to everyone who is having a “bad stock day”!
Rule of thumb about the markets
Expect markets to fall 10% once a year, 20% once in a couple of years and 30% fall at least once a decade. This is unavoidable. This is how a normal market functions.
For many people, this is the first year in a long time (or perhaps ever if you are a new investor) of a almost 20% correction. My portfolio dropped aprox. 6,5 % in 2018.
There is no need to worry about temporary swings because the value of stocks have always increased as the earnings of the underlying companies have gone up.
If you invest in index funds, the market is self-cleansing. This means that the good performing companies will still be a part of the index, while the bad performers will be thrown out of the index.
This again ensures that the market in the long run will always point upwards. The market is not stagnant. Companies routinely fade away and are replaced with new blood (companies).
Nobody loves to see the portfolio value going down. But this is the price which has to be paid for long term growth. In most aspects of life, nothing worthwhile can be achieved without some amount of pain and sacrifice.
In equity investing, seeing your wealth going down, though it is temporary is the pain you’ve to go through for building long term wealth.
Just continue to stay the course remembering the long term results are always good for those willing to undergo short term pain.
2. Buy more index funds
Jason Zweig (author of Your Money And Your Brain) often said that the problem with stocks is that little letter T. If you take the T out of stocks, you’re left with socks. They have almost nothing in common:
Would you ever pay $500 or $1,000 for a pair of socks without asking how they could possibly be worth so much? Would you be upset if your favorite store started selling socks at 50% off? Of course not. But when it’s stocks instead of socks, people make those mistakes all the time.
Once the pain and fear of loss kick in, it can be nearly impossible to think calmly enough to use your reflective brain to figure out the right course of action. But in the face of falling share prices, you must systematically analyze whether bargains are being created. That’s why it’s so important to plan ahead.
Buying a stock without first calculating the value of the underlying business is as irresponsible as buying a house without ever setting foot inside. And you should never sell a stock without first asking whether a falling share price has made it a better investment than ever.
We buy high and sell low. This applies to all of us. It is the way humans are hard-wired. We are psychologically unsuited to prosper in a volatile market. It takes an act of will and effort to understand, accept and then change this destructive behavior.
You know you should buy more index funds when the stock market is on a huge sale, but it’s really hard. Isn’t it? This is the difference between the people who are rich (and who stays rich) and the “poor”.