Many investors are starting to question their long term investment strategies after the recent market correction. The stock markets have been on a roller coaster ride for the last few weeks as the U.S. fumbled their way through raising the debt ceiling, and then the U.S. government’s credit rating was downgraded by the S&P.
The Dow Jones Industrial Average dropped nearly 7 percent on Monday before recovering most of its losses yesterday. Throughout these few weeks we’ve heard rhetoric on both sides of the debate; should you sell your stocks in a panic before the stock market crashes even further, or should you take advantage of the dip in the market to add more equities to your portfolio?
Should You Sell Your Stocks?
If you are getting close to your retirement age you might be panicking at the thought of another stock market crash. It’s perfectly understandable, afterall, you don’t have time to wait around for the recovery at this stage of your life. But rest assured this is no time to panic and abandon the stock market for good.
Take a step back and review your overall investment strategy. Have you set-up a proper asset allocation with a balanced portfolio of fixed income investments and equities? If you don’t have the stomach to handle the volatility of the stock market, perhaps your allocation was weighted too heavy in stocks to begin with.
Remember not to get caught up in the media frenzy that takes place every time the markets get jittery. If you went away for a long weekend and missed the action in the stock market on Monday and Tuesday you would have barely noticed a difference from the end of day Friday to Tuesday’s market close.
Are Stocks Really On Sale?
I was surprised to read a large number of personal finance writers advocating that investors should use this opportunity to add equities to their portfolio, as if this were a Boxing Day blowout sale on stocks. Sure, it makes sense to buy when prices are low, but should you really try and time your entry point into the market based on one or two days of high volatility?
I can recall thinking last summer that some of the dividend stocks on my watch list were getting expensive and it would be nice if we had a pullback in the market so I could buy in at a cheaper price. Well, if you thought the markets were expensive last year then you should take a look at this chart of the TSX over the last 12 months:
Stay Calm, Be Brave, Wait for the Signs
It’s amazing what fear can do to an investor’s mind-set, even though we’re dealing with the exact same number as we were last year. For the average investor, we would do well to ignore all of the daily up’s-and-down’s of the market and just make regular contributions each month. By dollar cost averaging we can avoid the tendency to try and time the market based on a one or two day event.
I find a lot of similarities to the fear of high gas prices every year. Most consumers will go out of their way to save a few cents on gas, and will even top up an already half-full tank if they see a dip in gas prices. I prefer to fill up with $50 every two weeks and smooth out my savings over time.
In these uncertain economic times you will hear so-called expert advice on everything from buying bargain stocks to abandoning the market and buying gold. But whether we are headed for a double-dip recession or if this is just minor market turbulence, don’t forget how to invest your money wisely and stick with the long term investment plan that works for you.