It seems like 2008 all over again as stock markets around the globe continue to free fall against the backdrop of slowing economic growth and sovereign debt fears. I wrote a couple of posts back in ’08 on reacting to market volatility and it is eerily applicable to what we are going through today. The US debt ceiling debate seems long gone and inconsequential as investors see their investment portfolios and retirement accounts get decimated. However now is not the time to sell – it is too late for that and likely a losing strategy. Unless you are in desperate need of the cash or feel that the market still has a long way to fall, it’s best not to panic and remember these 5 key pieces of advice.
1. Take a step back and stay calm. Don’t make your investing and trading decisions myopically in a state of panic or fear. In the bigger scheme of things, the recent correction may just be a short term blip and could be an excellent entry point into the market. This has been the case in the last two to three market corrections. If you do not need the cash and can afford to ride the market volatility out over the near term, then it is a much better long term approach to hold on to your stocks, mutual funds or ETFs and wait for things to improve. There is no harm in revisiting your investment strategy/plan, but don’t change it drastically based on a few tough days in the market
2. Take advantage of great buying opportunities. In a volatile market you are going to see a lot of good stocks get taken down and this is when you can make a lot of “easy” money. If you have a list of companies that you always wanted to invest in but thought were too expensive, this may be the time to buy their stock. After all if the company fundamentals have not changed, then it will likely outperform when the markets calm down and economic fears recede.
3. A lot of people are in the same boat as you. Remember the story of the turtle and hare. Slow and steady wins the race. If none of the fundamentals of the stocks you own have changed drastically, then don’t panic sell during periods of high market volatility. Otherwise you will be breaking the basic investment paradigm of buy low, sell high. Further, with the volatility current being exhibited in the stock markets, you will have an opportunity to sell on big “up” market days that seem to follow big down days.
4. If you are losing sleep then sell some of the stocks that have done well for you. A buck in hand is worth more than a buck in paper profits in some cases. Alternatively buy some protection via put options or writing call options for example, if you want to protect your downside.
5. Have patience. It will take time for markets to recover. After all a 10% drop in stock prices requires a larger increase to get back to existing levels (e.g. a $100 stock falls 10% to $90. To get back to $100 it would have to rise 11.1%). Traders and retail investors need to time to get their confidence back, but once they do we can expect to see large rallies if history is any guide. Also, we are almost 100% up from 2008 lows, so if you are a longer term investor or worried about your retirement accounts you are likely still doing okay.
Too often people panic in times of uncertainty and take drastic measures. Long term investors have to realize that the market is going to have corrections and if they panic when these corrections happen they will lose money. Investing foolishly is a bad strategy, selling blindly is an even worse one.