Today’s stock market was the first green day in a series of devastating red days throughout the last month. When the stock takes a dip, panic selling is commonplace. It is almost always a mistake. People often say that they’ll get out before it gets worse. And then say they’ll buy back in after it hits “bottom”.
The problem is that no one knows where the bottom is. And timing the market ALWAYS loses to just raw time in the market when we’re talking about long term investing.
YouTube’s Meet Kevin brought up and interesting theory behind the reason investors panic sell. It’s a fight or flight response when we are feeling pain. Yes, pain. Red days cause psychological pain. If you don’t believe it, then you haven’t been paying attention or aren’t actually investing.
So when the market sells off and you see your portfolio drop day by day, you can’t fight it. What are you going to do, punch the market into submission? Good luck. There’s only one choice left in the fight of flight, and it’s flight. Get out.
It’s the only way to stop the pain. How do we not feel the pain? Like most things in life, it varies from person to person.
On the one extreme, you have diamond-handed apes that are too smooth brained to know how to sell when stocks plummet. And on the other extreme, you have paper-handed pansies that will sell at the whiff of a mild breeze. But really, we’re mostly somewhere in between and it’s up to us individuals to determine where we are on the spectrum. And then we work on getting better at dealing with it.
The first thing to do is to invest money that you don’t need in the short term (within 5, 10, 15 years). Realize that investing is volatile short term and exponentially profitable long term. But you don’t get the long term gains when you try to time the market going in and out. You only get there by staying IN the market. Yes, through the ups AND downs.
If you’re so good at timing the market, sell your method, you’ll be the richest person in the world. Why hasn’t someone done it consistently? Because it’s impossible. Sure, someone (maybe you) can do it for a while. It’ll work, until it doesn’t.
So once you realize this is a long term thing, you have to actively resist the urge to sell. When the market crashes and you see red all across your screen, ask yourself on each of your stock holdings: has anything changed in the fundamental reasons why you invested in these companies/etf’s?
Next, ask yourself if these current stock prices in a vacuum (not looking at the most recent drop) is a price you’re willing to pay? Usually if the market crashes an amount that you’re concerned, the answer to this question is “yes, this looks like a great price!”
As a side question, when you see a shirt that you wear everyday and you normally buy for $20, being sold for $15 – would you buy it or wait until it is back to $20?
That’s exactly what a market crash is, it is an opportunity. As long as the fundamentals remain unchanged, you’re getting the same stock (or shirt) at a discount. Wealth is made on the red days – remember that.
And if all else fails and you can’t handle the volatility, automate your investments into an index fund and only look at it every year or so.