What To Do When The Market Goes Crazy
Recently, we’ve had some major volatility in the markets and people are wondering what they should do with their investments. In fact, Reuters recorded the biggest withdrawal of funds from the market on recorded history! (Story here)
Today, I want to address what people think happened and what really happened when these investors sold off in recent weeks.
What people think happened is they sold off investments that were going down to “stop the bleeding” of their money. They believed that they would be able to save money by getting out quickly and jumping to cash.
What really happened is they sold off investments and locked in their losses. They will not be able to participate in the growth when the market comes back.
Why do I say that?
Think of how you own your house. When the housing market goes down in your area, would you sell? No, of course not. You would lose a lot of money. What do you do? You stay in your house and wait until a better time in the housing market.
Similarly, when you own stocks or mutual funds, you don’t actually have money. You have shares, and these shares are worth money. Their value fluctuates over time, but until you sell your shares, you haven’t lost any money. You also haven’t made any money. That’s how the market works.
So what should have these investors done? In my opinion, they should have stayed put in the market and waited it out. By locking in their losses, they not only lose money, they also have the opportunity cost of being out of the market when it comes back up.
If these investors had a good adviser, the adviser would have done their best to talk the client out of selling their shares just because of a dip in the market.
If these investors had a good adviser, the adviser would have reminded them that when the market dips, it is time to buy more. It is not time to sell off.
Why? When the market goes down, it’s like a sale at the grocery store. You can buy more boxes of Mac & Cheese with $10.00 when they are $1.00 each versus when they are $2.00 each.
There are two main things that will help you be a successful investor for your life.
One - build your portfolio based on academic research and personalize it to your own risk tolerance.
Two - hire a coach who will help you build this portfolio and keep you on track.
Is your portfolio designed efficiently? Are you working with a coach?
If you don’t know how your portfolio is designed, contact me. I would love to sit down with you and help you understand what you’re doing so you can be a successful investor.
