The current stock market turmoil has prompted many investors to re-think their investment approach. Should I buy on this dip, or wait for the bottom to hit? Is this a good time to sell and take profits? What about the long-term economic outlook? Should I buy more oil & gas stocks?
It’s easy to stick to our investment philosophy when markets are going up, but when faced with the slightest uncertainty our instincts take over. We want to intervene, as if we can somehow guide our portfolio to safety and avoid any loss.
Sorry, but no one can help you during a stock market correction. Watching your portfolio drop from $100,000 to $90,000 over the course of a few weeks is painful, no doubt. But you’d be better off sticking your head in the sand and waiting it out instead of trying to “do something about it.”
What can you do in a stock market correction?
For investors with a long time horizon ahead of them, a stock market correction should be seen as a welcome opportunity. Stocks are cheaper today than they were last month.
But unless your investment plan involved sitting on a bunch of cash until this happened, you probably don’t have any extra money to invest right now. And that’s ok.
Listen, I’d love to say that I’m using this opportunity to buy more stocks, but the reality is that I was already fully invested and with no money on the sidelines I’ll just have to wait, watch, and do nothing.
MoneySense republished a timeless piece by Dan Bortolotti titled, “Fighting the enemy in the mirror.” It talks about tuning out the noise and sticking to your plan, no matter what.
“You want all your holdings to be winners all the time. Yet many investors second-guess themselves when one or two asset classes underperform. You are always going to have something that isn’t doing as well as something else. So you need to get over that gnawing feeling that you’re compromising your portfolio if you don’t have all your eggs in the winning basket.”
In The Intelligent Investor, Benjamin Graham asks readers to imagine that he or she is one of two owners of a business, along with a partner called Mr. Market. The partner frequently offers to sell his share of the business or to buy the reader’s share.
Mr. Market is manic-depressive, with his estimate of the business’s value going from very pessimistic to wildly optimistic. The reader is always free to decline the partner’s offer, since he will soon come back with an entirely different offer.
The point of the story is for the investor to concentrate on the real life performance of his or her companies and receiving dividends, rather than be too concerned with Mr. Market’s often irrational behaviour.
Mr. Market is often identified as having human behavioural manic-depressive characteristics, it:
- Is emotional, euphoric, moody.
- Is often irrational.
- Is there to serve you, not to guide you.
- Is in the short run a voting machine, in the long run a weighing machine.
- Will offer you a chance to buy low, and sell high.
- Is ‘frequently efficient…but not always.
Mr. Market’s behaviour allows the investor to wait until Mr. Market is in a ‘pessimistic mood’ and offers low sale price. The investor has the option to buy at that low price. That means patience is an important virtue when dealing with Mr. Market.
We’ve been in a bull market for more than five years now and, with the exception of a few blips in 2011 and 2012, haven’t seen the kind of pullback that really shakes our confidence.
Related: When is the best time to invest?
A stock market correction offers investors a chance to test their mettle – to determine if their investment plan is just words on paper or a true philosophy that can stand-up for the long term.
What are you going to do?