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:

TSX 1-Year Chart

TSX: August 2010 – August 2011

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.

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8 Comments

  1. My University Money on August 10, 2011 at 8:34 am

    Haha, I’m one of your aforementioned writers that is suggesting buying stocks right now is a good idea. It’s true that stocks might fall further, or even test the lows of 2008 (this is the main question in my article today), but if so, I like to be buying the whole way down. This is a pretty good entry point (or at least it was when I wrote the article, before the big rally) on a lot of stocks. Sun Financial for example currently has a P/E under 9, and a yield of 5.7%. That is ridiculous for a well diversified company that will be able to ride the market recovery all the way to the bank. The stock market survived two world wars and a depression, I’m not too worried about some extended de-leveraging, and a wealth shift to the emerging world (there are plenty of growth opportunities left to invest in).

  2. Echo on August 10, 2011 at 8:47 am

    @My University Money – I’m not suggesting that it’s a bad idea to buy stocks right now. If you’ve been waiting for a good entry point on a particular stock or sector and it’s in your target range now (and you have cash to buy with) then you absolutely should pull the trigger now. In fact, the insurance sector looks really beat up right now, which is great news for bargain hunters.

    Back in ’08-’09, there were over a dozen days like Monday’s market meltdown, so I’m just saying that investors don’t need to react (either way) based on one or two days.

  3. krantcents on August 10, 2011 at 10:20 am

    Good advice, but it is very hard to filter out the noise. It is on the news, in the newspapers, online and in magazines. I am sticking with my plan!

  4. Crystal on August 10, 2011 at 11:18 am

    This is a good advice for me like an young long-term investor.I think that it’s certainly important paying attention on now market, yet more important is staying away buying or selling stocks based on one or two days market volatility.

  5. The Wealthy Canadian on August 10, 2011 at 8:51 pm

    From a personal standpoint, I think if you have a well balanced portfolio with a solid asset allocation mix, now could be the worst time to sell stocks.

    Don’t get me wrong, there are certainly many investors out there that are heavily exposed and invested in speculative value plays that have likely tumbled over the past couple of weeks to say the least.

    I’m taking more about large-cap, blue chip dividend paying stocks that have a long-term history or share price appreciation.

    As you mention, it’s unfortunate how many investors sell large chunks of their portfolios to seek shelter at the worst possible time.

    This is either a result of fear or simply having a poor asset allocation mix – or both.

    Nice post!

    • Echo on August 10, 2011 at 9:56 pm

      @TWC – I believe that a lot of older investors are freaking out at the thought of another stock market crash and are thinking about selling it all this time. It’s unfortunate, but that’s the reality when most people don’t understand their investments and risk tolerance.

  6. Jean on August 10, 2011 at 11:27 pm

    At the end of the day, its all about going back to the fundamentals. Yeah the media overhypes it and sometimes the market can oversell or make drastic moves. As long as you don’t have a liquidity issue and can hold a stock position for a very long time, the best thing to do in my opinion is go back to the basics. Take a look at your current stock portfolio. Look to see how the balance sheets are on the companies you have invested in and look at that company’s future outlook. No matter what the market is doing in my opinion, there is nothing stronger than first looking at a company’s balance sheet and starting to make your decisions from there.

    -Jean

  7. youngandthrifty on August 11, 2011 at 10:23 pm

    I am also part of the group that thinks that it might be a good time to buy some of the stocks I have been eyeing (or at least add to some positions). I think it the company is a strong company, good dividend yield that has been increasing consistently (e.g. FTS) then I think it is a good time to add some positions. That being said, it’s hard to find the capital to!

    Good objective post for whats been happening in the markets, Echo 🙂

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