Okay, so there I was in Lisbon, Portugal a few weeks ago, staying in a hotel with relatively inadequate Internet access. Not to mention an 8-hour time difference, which made it rather difficult to keep track of my stock portfolio even under good Internet circumstances.
Suddenly, interrupting my conference was the early evening BBC News item that the U.S. stock market was going lower, lower, lower. By the end of the evening, almost bedtime for me, the Dow had dropped more than 400 points. This was several weeks ago now, but the memory of that plummet resonates in my head. It’s like something almost concrete and horrifying: watching your stocks go down, down, down while you stand there like a deer in the headlights, unable to do much of anything to rectify the situation.
Okay, it’s actually not that bad. I’m being overly dramatic for a reason and to make a point with you that is vital: the stock market does GO DOWN! I don’t know why people — particularly new investors — find this so difficult to get their inexperienced heads around. They seem to think and operate under the belief that the market will only go up, up, up, inching higher and higher and bringing only smiles to investors’ faces.
It just doesn’t work like that.
Imagine a stock market that never, ever corrected, never went down. First of all, the Dow Jones Industrial Average would be about 2,346,589 instead of in the 12,000-point range. And secondly, if it were a guarantee, wouldn’t everyone in the entire world be selling the farm to put money into a market that only went up?
Part of the challenge of the stock market is the potential for loss. Part of the risk is the promise of a better return, as we’ve said before in this column. Safety means a 5-percent, 6-month CD that at the end of the 6-month period pays you … 5 percent. Nothing more, nothing less. No surprises. Just safety. Security. Almost no risk.
But when you buy equities, you are subjecting yourself to the potential of global surprises, economic downturns, news items that throw markets into turmoil. One piece of negative news can spoil the profits of a market in a very short time. That’s what happened a few weeks ago: the sub-prime mortgage sector started to unravel, and along with it the Japanese yen and various other factors, and the U.S. market took a hit.
One of the reasons I love the stock market and investing is that it encompasses so much: history, psychology, economics, sociology, culture, etc. There’s hardly a topic or an area of study that doesn’t impact to some degree what happens in the investment markets around the world. But the downside of that involvement is that bad news can send the market tumbling, as witnessed several weeks ago.
So what is an investor to do? Yes, if you start investing in the stock market, you will experience a bad day or two — or even a bad week or month or two. It’s inevitable, not “if” but “when.” How do you handle it?
There are several options:
One, you can do nothing. You can assume that what goes down will eventually come back up again, including your stock portfolio. Just go to a movie, read a good book, take a walk in the park, anything to forget that your stocks have dipped down. And then you’ll look like a bulwark of self-assuredness and confidence when the stock market comes back up again. “I just relaxed and let it come back,” you’ll nonchalantly be telling friends and acquaintances who want to know how you weathered the storm. You’ll look like the Rock of Gibraltar!
Two, you can sell in a panic, which I don’t advise. Many people do just this, and it is a sloppy way to be an investor. It means some guy out there is getting your stocks at a bargain price, on sale. The people who made the most money in the Crash of 1929 were those who bucked the trend and bought property and equities when everyone else was selling. So let’s pretend I didn’t give you this option. It’s a bad one.
Three, you can buy more of what are your good stocks on sale. This is one reason why it’s good to always have some cash on the side, so you can jump in when there’s a “sale” in the stock market. This will also average down the cost of your stock, which means it winds up costing you less to buy it and more profit when you sell it at a higher price.
See, there’s no need to panic. Stay calm. The market is like the ocean, ebbing and flowing. It’s normal; it’s natural. Now, aren’t you comforted and reassured?