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| Stock market will fluctuate. Keep invested at all times. |
Warren Buffett: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Recently I was reading a finance article that reported how more than 60% of people who sold stocks during the pandemic market crash of 2020, regretted their decision. Many of the people who regretted their decision were the ones who got out of the stock market but never went back in, as the market rebounded.
For many of these people, sitting on the sidelines with cash, turned out to be a bad decision. If they had stayed the course, the market would’ve recovered all its losses in about 4 months. Instead, many lost money when they sold when stock prices were lower during market sell offs in February/March. They then lost more money when the stock market rebounded by July, but they were not invested to realize those gains…
In this post, I’d like to discuss why it’s important to always stick to basic principles of investing.
When market dives, most people will panic, despite all the literature/articles/posts that are available telling people NOT to sell during market corrections. When they panic, they will sell at a loss, then convert that to cash or other ‘safe’ investments.
I’ve read about a fellow FIRE movement retiree who sold all his stock holdings, then converted those to cash during the same period. He sat on the sidelines for several months and missed the rebound. In his own words, he lost tens of thousands of dollars when he sold at a loss, but more importantly, he lost potentially more money by sitting on the sidelines, while the market rebounded.
This mistake is actually more common than you think. As a follower of the FIRE movement, you’d think we would all know what to do when the market tanks. This isn’t always the case as seen in the example above…
What he should’ve done is to stay the course, and not panic. All FIRE movement followers are investing for the long term. A blip here and there, or even a major market correction, as we saw during the Great Recession, shouldn’t deter us from staying the course.
When emotion comes into the equation, even the most experienced investors may hit the panic button. No one likes to lose money. For some, it’s an embarrassment to lose money we so smartly invested. We want to show the world how smart we are with our investments.
For others, it’s simply the fact that our hard earned retirement savings is going down in value, that makes it hard not to hit the panic button. I mean, no one likes to see their 401k/IRA go down in value by 20% or more.
As Peter Lynch (famed investor who headed the Magellan Fund at Fidelity Investments) once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
The key to being a good investor is to not be swayed by daily market gyrations, but rather to think long term. The longer you stay invested in the stock market, the better it is. Despite all the market crashes that happened throughout the 20th century and the 21st century, stock market has shown to be incredibly resilient.
There were multiple wars (and two World Wars), famines, droughts, terrorist acts, inflation, deflation, the Great Depression, the Dot Com Crash, the Great Recession, and recently the Coronavirus. Just in my lifetime, I lived through several of these market crashes.
The stock market still going strong after all these major, cataclysmic events, is why you must always be invested in the market. Remember, you only lose money when you sell at a loss. Even if stocks go down in value by 50%, that is only a ‘paper’ loss. It’s only a loss when you decide to sell at a loss…
Here are my recommendations on the right way to invest:
- Think long term, like a marathon and not a sprint
Warren Buffett’s quote on top is one of my favorite quotes. If the ‘Oracle of Omaha’ thinks long term is a good idea, then I’m going to listen.
One practical reason for thinking long term is that the history shows the longer you stay invested, the better you’ll weather the storm. Translation: You will most likely not lose money, and you will most likely make money.
I read an article showing how investing for the long term (at least 10 years, but preferably longer) dramatically reduces the chance you’ll lose money in the stock market. Here are some interesting statistics:
- If you invested for 10 years, you may lose your money around 6% of the time while your chances of making money is around 94%.
- If you invested for 13.5 years, you will NOT lose any money while you would be guaranteed to make some money.
Note: The author looked at the stock market data from January 1971 and May 2020.
- Buy, hold, then buy some more
Buy index funds that track the S&P500, the NASDAQ, or Russell 2000 (small companies). Don’t even think about selling these. Keep buying more. This strategy worked for many FIRE movement retirees. Don’t try to reinvent the wheel.
If you like bit more variety, start adding some actively managed funds, bonds, etc. once you’re comfortable with investing.
- Don’t sell when they’re down; use this as an opportunity to buy more instead
When market crashes, it presents an opportunity to buy more funds at a discount! Let’s say an index fund was $100 per share, then the market crashed. It’s now trading for around $80, losing 20% of its value.
By buying more of these funds now, you’ll be buying these at a 20% discount. This is the mindset you want to have.
Don’t be afraid of market crashes and corrections. They have always happened and they always will happen.
Use this time to buy more shares at a discount. The more you do this, the faster you’ll become financially independent.
When you use a company sponsored retirement account like the 401k, you’re buying more shares on a regular basis every time you get a paycheck. This method is called dollar cost averaging, where you’re procuring more shares at different share prices (as fund values go up or down), which in the end, can lower the cost of a fund and minimize risk.
The key point is here is to constantly buy more shares in both up and down markets.
- Don’t fear the market crash or correction
Market crashes and corrections will always happen. Don’t change your investment strategy because of that.
There have been more money lost selling during crashes vs just staying the course. Inevitably, those who sell will not get back in the market to benefit from eventual market bounce back.
Some of the biggest bounce backs have happened after market crashes. Just recently, the crash caused by panic selling during February and March 2020 (Covid-19), was fully recovered by July 2020.
Since no one can know the future, it’s better to just do your thing. Do not sell, invest constantly and do not deviate from your long term strategy.
Almost all FIRE movement retirees keep a year or two years yearly expenses in a savings account to use in the event the market crash lasts a long time.
I cannot stress enough about the importance of having an emergency fund. Be prepared for inevitable market crashes by having cash readily available in the form of a savings account or a money market account.
In conclusion:
One of the hardest things about investing is staying the course when market seems to go lower and lower. It requires Herculean effort to not deviate from the long term strategy of staying invested at all times.
It’s this contrarian stance that’s required to stay put. No one likes to see their money go down in value. Keep in mind though, you only lose your money when you sell at a loss.
For most of us who are using retirement accounts like the 401k or the IRA/Roth IRA, you most likely won’t need this money until after you’ve retired.
Even if you don’t use a retirement account, but use a brokerage account, the need to stay the course is still the same. The endgame to become financially independent is still the same…
Stay the course, and use market crashes as an opportunity to buy more shares at discount. By changing your mindset, investing for the long term will become easier.
Thank you all for reading and good luck on your investing journey!
Jake
Wandering Money Pig
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