2015 has been a rough year for investors with most US stock indices down or barely up as of 10/13/2015.
The stock market has had some very scary moments that have caused many investors to sell and even got me to sell two of my stocks (UA & FB). I sold both of those due to them being very richly valued and I feared they might break significantly downward should the market continue to deteriorate.
For the most part though, I have done nothing. In fact rather than sell, I bought a few more stocks (GILD, DIS, CVS, COST) at what I think are reasonable prices and three out of those four are up at this time from my buy price. When the stock market is down, it is time to start thinking about buying if you are in it for the long term.
Long Term Time Horizon Allows Me To Invest With Less Fear
Most investors are inflicted with a short term mindset that causes them to panic and make mistakes. The main mistake they make is to panic and make too many trades. Its hard to avoid this with all the industry hype that goes on day to day in the media. I found this comment about Apple’s stock and the “experts” who give their opinions about it on what seems to be a daily basis. I completely agree that everything nowadays is set up to make you feel the need to actively trade in and out of stocks:
Indeed, when I sit back and do nothing in my portfolio, no one is making money off me and no one who is in the industry wants that. But doing nothing is what long term investors do most of the time! I’m under no illusion that I can predict what the market or any particular stock will do day to day or week to week. All I want to do is pick stocks of good companies that are undervalued or reasonably valued with the hope that over time, the stock prices will rise. That means I will have to be able to withstand and tolerate any meaningful drops in the stock market and the stocks I own. THAT is the hardest part for most investors and it is for me too.
If You Sell, When Do You Get Back In?
The biggest problem if you do decide to sell some or all of your stocks when the market is tanking, is figuring out when to get back in. August 18 through August 25 saw a huge 10%+ drop in the markets in just six days. That flushed out a lot of investors who decided they had had enough and just wanted out. They were terrified and wanted out at any cost.
So, if that was you, unless you are no longer going to invest in the stock market ever again, at what time do you decide it is alright to once again start buying stocks? The market has gone partially back up since that drop but it could go back down again at any time. Once you sell and get out it is easy to get paralyzed and never get back in because you are afraid.
If you wait to buy back in when the market goes back up to where it was before the drop, you will likely have sold your stocks at a low price and bought them back at a higher price. That is the exact opposite of how you make money and it all happened because of fear. Your fear. That is why doing nothing at a time when others are panic selling is often the right decision, if you can have the stomach to sit tight.
That is why you must learn to understand your risk tolerance and why it is best to invest for long periods of time with money you don’t need soon. Those long time horizons allow you to avoid panicking when the markets are going down, stand pat while everyone else freaks out (sell stocks selectively if needed), and buy more stock at lower prices.