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What Are You Doing With This Stock Market Pullback?

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 should investors do during a stock market correction

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.

Related: Tune out the noise, stick to the plan

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.”

Mr. Market

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.

Related: How behavioural biases kept me from becoming an indexer

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.

Final thoughts

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?

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12 Comments

  1. Barry @ Moneywehave on October 16, 2014 at 10:47 pm

    As an index investor I have yet to take advantage of the drop off since all the indexes have fallen. There’s no real reason for me to re-balance right now but with prices being where they’re at, I might need add some funds to my RRSP and make some purchases.

  2. richard on October 17, 2014 at 5:58 am

    Good post. I have a little cash on the side along with some ideas when the valuations get better. Most of all, I am not as worried as 2008/2009.

  3. Bernie on October 17, 2014 at 6:43 am

    It’s business as usual with me. I don’t concern myself with price fluctuations so long as my dividend growth stocks continue to increase their dividends. Down markets provide great buying opportunities for long term investors but at this stage I’m only buying when I accumulate $2,000 from my dividends. I haven’t added in any new money since I retired other than topping up from room in my RRSP.

  4. Andy on October 17, 2014 at 6:45 am

    Good post. As an indexed investor I will do absolutely nothing !! For my dividend investmentsci will also do absolutely nothing !! Love being a couch potato !!!

  5. Grant on October 17, 2014 at 7:54 am

    My pay check happened to arrive yesterday, so as my Canadian small cap ETF and emerging markets ETF were most below target, I invested the money there.

  6. Robert on October 17, 2014 at 8:43 am

    My emotions wish I had sold everything 1 or 2 weeks ago. My net worth would be much higher today.

    I have a re-balancing plan inside my RRSP because I am badly overweight in one REIT. This morning I reviewed the effect of the dip and sold some of my REIT, and together with some cash on hand bought into 2 of my holdings that I am accumulating, where a price gap has opened in the last 2 weeks with respect to the REIT.

    Easy change and on target for my existing plan, which otherwise I would have sat on until later in the year had the dip not been kind enough to kick in some bucks for my plans.

  7. CanadianDaniel on October 17, 2014 at 9:05 am

    I gave up trying to time the market 5 years ago (should have done so much earlier). Now I use dollar-cost averaging and will modestly add to a couple of low-cost EFT index funds and one blue chip stock (Fortis, which I know you also own).

  8. Dan @ Our Big Fat Wallet on October 17, 2014 at 9:12 am

    I actually did have a small portion of cash sitting on the sidelines for opportunities like this and have invested it while prices are still low. I think it’s good to set aside some cash for the future in case the markets temporarily decline. This most recent downturn also showed many people (including myself) the importance of diversification. Oil and gas stocks got hit hard and they’re still low. Anyone who was solely into oil and gas would see their portfolio value drop drastically over the past couple weeks.

  9. Sean Cooper, Financial Journalist on October 17, 2014 at 7:34 pm

    As Stephen Harper once said, this is a great buying opportunity. I don’t blame a lot of investors on being scared to invest. My father’s financial advisor reocmmended he put $100K in the stock market at once at the beginning of September. If he had of done that he would have lost a lot. Seems to me his advisor should have recommended dollar cost averaging.

    • Echo on October 17, 2014 at 8:34 pm

      Hi Sean, the evidence suggests that your father made the right decision at the time. Lump sum investing tends to work out better than dollar cost averaging over the long run.

      Investors who are upset or worried that they made the wrong choice by investing before this correction hit should take comfort knowing that no one could have seen this coming and in a few years it will just be a tiny blip on the radar as the markets move past this to achieve new heights.

  10. Tocco on October 17, 2014 at 11:52 pm

    Selling winners into all rallies if they reach my targets otherwise protect my portfolio. Raising cash and buying stocks with growing dividends. I expect the long-term that we are still in a bull trend but we need a healthy correction. As it takes time to create a market top so will it take time to form a bottom. I think this current rally will fail and then spx: 1836, 1782, 1728, and etc….

    Tocco

  11. Alan Whitton on October 20, 2014 at 10:28 am

    There was a stock market pullback?!? Why wasn’t I informed? I have been so busy building my germ-free environ in my home, I have had no time for such trivialities as my retirement funds!!

    I mostly just keep on living and rebalance when calendar tells me to do so, but thanks for giving me something else to OBSESS about! Where did I put all that germ-killing lysol?!?!

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