After
a record-breaking run of the U.S. stock market, the major market indices (Dow
Jones Industrial Average, S&P 500, etc.) not only took a pause, they went
backward for a few days. The Dow losing
a thousand points in a day can be unsettling; and it didn’t seem to take much
to make it and the broader market reverse course. The Federal Reserve decided not to cut
interest rates just yet, probably waiting until its September meeting; and that
was followed with some weak quarterly reports from a couple of big companies; someone
said the word “recession.” And suddenly
the stock market drops by the hundreds of points.
What
did YOU do in response? If you answered,
“I got out of stocks and put the money in a safer investment” then I have to
give you an “F” in investment strategy.
Consider
this analogy. During a recession it is
not only stocks that lose value; very likely your house goes down in market
value. What should you do then with your
house? If you sold your house because
you were afraid it would continue to lose value, then it is possible you will
have received less for it than you actually paid for it originally. AND you would have to find a new place to
live. But if you held onto your house,
you would still have a roof over your head and the loss in value would only be
on paper. It would eventually go back up
in value.
It
is much the same with your Individual Retirement Account, 401(k), or other
account where you hold stocks and bonds.
In the context of deciding what to do when the stock market takes a
dramatic downturn, it is a mistake to look at that account as a pot of
money. Instead, see it as a collection
of shares. Shares of a company, shares
of a mutual fund. Now those shares are
worth less, but you still have the same number of shares. If you start selling them because you are
afraid of losing more money, then you are selling them when they are worth
less—possibly less than you paid for them when you invested. And when the market turns back and starts
gaining again, if you decide to jump back in then you will have to purchase
those shares at a higher price than when you sold them. So if you received $1000 for those 100 shares
you sold and now you want to reinvest that $1000, you may only be able to get
80 shares. And it is the number of
shares that is critical to your investment.
Your investment account grows in value because the individual shares in
it become more valuable. And dividends
are paid on a per share basis. The more
shares you own, the bigger your dividend.
In
short, by panicking and selling whenever the stock market declines and waiting
for a recovery to reinvest, then you are selling low and buying high. It’s like waiting until a sale ends to go
purchase your new sofa—the exact opposite of what you should do.
Naturally,
investment decisions must be made within each person’s personal context of risk
tolerance, when the invested money is needed, age, and other factors. I only speak in generalities here and cannot
tell you what you should or should not do today with your invested money. But I can say that, generally speaking, panic
selling is probably the biggest mistake most investors make, whether they are
rookies or veterans.
Until
next time,
Roger
“The
plans of the diligent lead to profit as surely as haste leads to poverty.”
Proverbs 21:5 NIV*
*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™ Used by permission. All rights reserved worldwide
