Looking at stock markets across the world, it is a sea of red. It has been a long time since we have seen such downward moves in the markets. But this is no time to panic. Having drawdowns is a normal part of the market. Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime.
There is real panic right now. And it requires steady head.
At this point I will reiterate what I wrote in December 2018. Those that used it as a guideline have benefited from its wisdom. December 2018 was the last time we saw such volatility in the markets.
So if you are panicking try the following out.
Put the Kettle on, sit down, and and write about how you feel about what is happening in the market. Be free, true and honest. to yourself. If you feel a pit in your stomach, write it down. If you feel jittery, write down. If you think a recession is imminent, write it down. If you want to liquidate your portfolio and go to cash, write it down. Basically write down whatever you feel about the markets in this moment.
Once done putting your thoughts to paper, date it and put it away.
Chances are very good that when you read it again 12-18 months from now, you’ll be shocked you felt this way. Your brain will try to convince you that you ‘really’ didn’t feel everything you wrote, because things will have calmed down. Corrections and bear markets are a feature, not a bug of the stock market.
As I have mentioned above, expect markets to fall 10% once a year, 20% once in couple of years and 30% fall at least once a decade. This is unavoidable.
Now you might ask yourself, ‘why do stocks have to crash?’ The better question would be, ‘what would happen if stocks didn’t crash?’. Let’s think about this. If stocks never crashed – or if they gain the perception that they don’t crash – prices would rise so high (as everyone would be bidding them up) to the point where a new crash was guaranteed.
In short, markets will always crash. That is inevitable. It’s what you do about it that will determine your performance over time. If you panic during crashes and sell, you will be left with mediocre returns. If you simply hold on and wait for a recovery, you will be left with good returns. And if you buy when there is blood in the streets, you will have excellent returns.
For many people, this is the first year in a long time (or perhaps ever if you are a new investor) of a 20%+ correction.Nobody loves to see the portfolio value going down. But this is the price which has to be paid for long term growth.
In most aspects of life, nothing worthwhile can be achieved without some amount of pain and sacrifice.
In equity investing, seeing your wealth going down, though it is temporary is the pain you’ve to go through for building long term wealth.
Just continue to stay the course remembering the long term results are always good for those willing to undergo short term pain.
And even better is to keep buying as long as you have money. Buying when markets are down is a way to buy stock on the cheap. It is a way to get more dividends for your money. It is a was to get more bang for your buck.
This is what I will be doing. I won’t be selling any of my stocks at this moment in time. Instead, I will look through my stock list , see which shares are attractively valued and buy them. I am sure my future self will be grateful that I remained level headed and used the dip as an opportunity to buy more shares in great businesses.