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Think Happy Thoughts When the Market is Down!
By JLP | August 20, 2007
While putting together my roundup last night, I ran across a couple of posts that were quite timely. The first was over at FiveCentNickel, who was lamenting the current state of the market and the economy. Nickel’s post then linked to a piece by Jim over at Blueprint explaining why he sold out of his Vanguard Target Retirement 2050 fund.
I’ll be the first to admit that it is difficult to keep emotions in check when it seems like everything is going to hell in a handbasket. However, if you are currently investing in the market via a 401(k) or IRA, in which you are contributing the same dollar amount each time, you should rejoice in the market’s current drop.
Why?
Because you now have the opportunity to purchase MORE shares with each dollar you invest. Let’s say you are currently investing $100 per month in in a mutual fund that traded at $100 per share. So, each month you are buying one share in that mutual fund (assuming the price doesn’t change from month-to-month). Now let’s say the market hits a rough patch and this particular mutual fund loses 25% and is now trading at $75 a share. Now you get to purchase 1.33 shares or 33% MORE shares than before.
Sure, it’s no fun to see your account balance drop but that’s what you have to accept when you are in pursuit of better returns.
And please, for the love of God, if you are in your 20s or 30s, DON’T move your money to “safe” investments until “things cool down.” If anything you should be investing more!
Learn to embrace volatility because over the long run, it’s a great tool!
Topics: Investing |
August 20th, 2007 at 1:42 pm
Selling now just locks in the ‘paper’ loss. I agree with you that those in their 20s and 30s should not change things at all.
August 20th, 2007 at 5:33 pm
Good point! I have been very happy about the fact that the funds in my 401k have dropped in price–because I’m still buying every two weeks (not selling!). When you sell, your profit is the average sale price minus the average purchase price. Here’s to low purchase prices! For all I care the market can stay down for the next decade–since I won’t retire and start selling until around 2040.
August 20th, 2007 at 5:47 pm
I agree that you shouldn’t move your money, and convert the paper losses to real losses.
However, I would wait a little bit to invest. Recently, the market has been extremely volatile, and has swung from positive to negative in the space of one day. While this may help hedge funds that thrive off volatility, as a long-term investor in the stock market, I suggest waiting for the market to stabilize a bit more before investing more of your money. In the meantime, keep the money in a short CD or money market account - you can also look into banks for their good interest rates.
August 20th, 2007 at 6:58 pm
Hi JLP,
I haven’t checked in for a while. I hope all is well. I like this post–it reminds me of a letter I sent to clients recently. I explained to them that certain people are “investors” and others are “traders.” If you’re an investor, volatility shouldn’t scare you away. It should do as you said–present an opportunity to purchase more shares at a lower price, reducing your average cost per share. I think the economy is strong and investors should stay the course!
Russell
August 20th, 2007 at 6:58 pm
I’m 25 and have been investing in the stock every month for the last 7ish months. I was THRILLED when a few of my stocks dropped double digits. I doubled my holdings in one company I totally believe in and grabbed a chunk more of others.
I laugh at volatility.
August 20th, 2007 at 8:39 pm
For Esmo: Unfortunately, no one rings a bell when the market reaches its bottom, giving the best time to buy. So just buy in when you have the money. Over 20 or 30 years, it won’t matter much.
August 21st, 2007 at 12:22 am
I’m thinking happy thoughts because I’m mostly out of the market now.
August 21st, 2007 at 12:21 pm
when dow hit 14,000 i took my funds out of mkt. i, too, am happy. i now just dabble in gold/silver. Mikey Certified Networked Advisor (CNA)
August 22nd, 2007 at 1:12 am
Well,
I would say that the problem with this kind of value investing is that you may not be able to buy a fraction of shares. It’s easy to say by making calculations in theory, somtimes practically it may not be possible.
For Mutual Funds, the units are alloted on fractional basis, but can we trust the mutual fund manager? They end up taking huge amounts of money as commission in the name of professional money management.
Best place to invest is ETF,
That’s what one of the professors from Rotterdam School of Management has advised and proved in his blog. (Link to article available on the name). Not sure if there are some pitfalls to the ETF investments. Will other readers be kind enough to throw some light on ETF investments and tell whether the article really is worth considering?
August 22nd, 2007 at 3:34 am
Just recently, I posted about my happy thoughts when the market went down in literally those words: “I am happy when the market goes down”.
It helped to have healthy cash reserves at the right time. Although, I am not too confident of choosing individual company stocks, I picked a number of ETFs in the past few weeks - US and foreign ones.