The last few months have been painful for investors. Some of my stocks are down 50% or more!
I know the stock market goes up over the long term. But, in times like these, it is tempting to just sell everything.
Two things help me overcome this temptation and allow me to stay invested.
1. No one can time the market
In theory, the idea of selling everything and buying later when stocks are down is excellent. But, there is no way to predict when the market will reverse course.
Let us look at the most recent example – March 2020. The Dow had fallen more than 10% due to pandemic concerns. But if someone has bought after the 10% fall, hoping that it was the bottom – they would be mistaken. The Dow fell another 10% on March 12.
Every time it seemed like a good opportunity to buy, the market kept falling. On March 16, the Dow fell 13% – its single biggest point drop ever!
Below are some of the WSJ headlines on March 16:
- President declares coronavirus pandemic a national emergency
- Airlines seek $50 Billion in aid from government
- Coronavirus cost to businesses and workers: ‘It Has All Gone to Hell’
- Investors are bailing on stock funds at near-record pace
News from the rest of the world was not any better:
- France’s Macron orders nationwide lockdown over coronavirus
- Single biggest shock: Airlines, airports battle coronavirus cash crunch
- FTSE 100 closes at eight-year low
- The global coronavirus recession is beginning
But then something interesting happened. After March 16, the market started going up. And it continued to go up – more than doubling over the next two years.
On March 16 no one could have predicted that markets would stop falling and start going up. In fact, no one did! As the market started going up, pundits kept predicting doom and gloom.
Don’t try to catch a falling knife.
Wall Street Wisdom
2. Simple investing works
I like to invest in growth stocks. But the bulk of my investment is still in a low-cost index fund.
Although growth stocks have gotten hammered, the border index is down only about 10%. This helps me sleep well at night.
The good news is that the basics (having an emergency fund, saving money, investing) work in any environment. While I plan to do nothing new, I do plan to continue with my simple investing strategy. That way, I put only a small amount of money in growth stocks. It also helps with dollar-cost averaging.
I have a long time horizon. The market going down next week, next month, or next year does not bother me, as long as it will be up over the next decades.
In conclusion
I am not doing anything different to deal with the downturn.
I am hoping the war ends soon. There are two things to remember about wars. First, they are terrible. That is why Ben Franklin said: There is never a good war or a bad peace.
Second, wars are unpredictable. Minor conflicts can quickly get out of hand. In 1914, Austria-Hungary declared war on Serbia. Russia came to Serbia’s defense. Then Germany got involved. France and Britain followed. Then Italy, US, etc. A war between two countries quickly turned into a world war.
Let us hope history does not repeat itself.