Markets in 2008 have started the year heading in the wrong direction. The markets are down 7.5% in less than 30 days. At one time this year, the market was down almost 14%. This shouldn't be too much of a surprise to anyone since the markets in 2008 are really continuing what was started in the second half of 2007. We've seen a lot of volatility and accordingly, I have had a number of people ask for my comments so I thought it appropriate to share them with all of my readers.
Why are people surprised?
Anyone who has invested in the stock market for any period of time should know that markets go down from time to time. In other words, what is happening with the stock market is a normal occurrence. Markets have always gone through cycles and will continue to go through cycles. The good news is for every year the market goes down, the market spends four times as much time going up. For every downturn (like the one we are seeing today), the market always reaches a new high in the future. Pullbacks are a necessary evil in stock market investing.
Should people be concerned about what is happening?
Whether people should or should not be concerned, the reality is they will be concerned. Why? Because investing is emotional. . It's human nature to be concerned. Especially when everywhere you turn, you see the bad news. I remember reading the headline “$90 Billion – Gone: TSX plunges 605 points to 2006 levels.” How do you think that makes people feel? How can you not be concerned? Anyone that thinks investing is not emotional is crazy.
Should people be doing anything with their money?
I think everyone has the same three basic options. The first is to get out the market and into cash. If you are surprised at the volatility and you can't sleep at night, I think it's time for you to get out but get out permanently. I guarantee you this won't be the last time this happens to the market. There's an old saying that says if it's too hot in the kitchen, then get out. If you are thinking about getting out for a while but plan to get back in when the market starts to improve, I think that is probably the riskiest strategy out there because market timing is a fools game. You may be better off to take your loss and go find something else that makes you feel better about your portfolio.
The other option is to stay put. For most people, this is probably the right strategy. Just like we have seen markets drop before, we've also seen them recover before. That's never changed. Although there is not guarantee, markets historically recover after severe drops within 6 to 12 months. Typically when big drops happen, a most of the drop has already happened. Staying put is easy if you hold good quality investments.
Lastly, market drops can sometimes be the best time to buy. Investing in markets is the only business I know where when something goes on sale nobody buys.
Remember that logic says you should buy low sell high. Unfortunately for most, emotion causes people to do the opposite. They want to keep their winners and sell their losers (Buy high and sell low). I recognize that buying now is probably one of the hardest things to do but if you really think about it, it makes sense.
At the end of the day, markets do what markets do. You can't predict it and you can't control it. If you invest in the markets, you have to accept this reality and realize that over time, you will win. For me, I have done nothing with my portfolio except that I continue to buy and invest. I continue to focus on the things I can control which will be to topic of discussion in next weeks article.