What to do in a Falling Market?

Recently, the stock market hasn’t been doing so well. Businesses around the world, like Apple and Kathmandu, are announcing disappointing sales. Just go look at your kiwisaver balance. You might find that it has decreased in value slightly.

The question is, what should you do with your investments when the market is falling? Specifically, your investments in stocks.

Several months ago, NZ business confidence was at a 9 year low. Stock markets around the world are in red. And now, people around the world are googling recession at the fastest rate since 2013. It’s understandable if all this makes you want to cash out your investments or shift you KiwiSaver to a conservative fund.

But don’t!

It’s a bad idea. Ignore the market. Go do something else. Spend some time outside while the weather is fine.

If you are investing for the long term, what is happening right now shouldn’t worry you much. The recent drop is the price you pay for the large gains we have been seeing in the stock market for several year.

What you are really doing by panicking and cash out your investments is realizing the loss. You are making the loss real. Currently, the decrease in value of your investment is only on paper. When you sell- it’s real!

What you should do is think of the fall in stock prices as an opportunity. An opportunity to buy stocks on sale. You would effectively be buying low, rather than buying high and selling low.

Stock markets (and passive index funds) go up and down in value over the short term. Ultimately thought, according to decades of historic data, they will continue to increase in value. So long as the underlying companies are operating and creating value that is.

If you are investing for retirement, or to become financially independent and possibly retire early, you should be using the dollar cost averaging method. You should drip feeding money into the stock market over time.

That means if you stop investing at this moment when markets down you will not be capitalizing on the cheaper stock prices. This will mean that you are in fact, buying high and selling low. Your not using dollar cost averaging properly.

This hold concept of ignoring short term fluctuations (and possible larger corrections) is often taught by many books and personal finance gurus, but in practice it isn’t always used.

As Warren Buffett says, be fearful when others are greedy and greedy when others are fearful. Just like a house, you want to buy in a cold market and sell in a hot market. Buffett also said that the time to sell is when your uber drivers start telling you how much money they are making in the market, and buy when your uber driver says he is completely out of the market.

I’m a millennial. I’m young and haven’t been through a ‘crash’/full cycle yet. I invest regularly, about twice a month, and at this stage, I couldn’t care less about what the market is doing right now. The way I see it is that each dollar I invest each month is going to earn me multiples over the long term. And the ones I invest when the market is in decline will probably make more than the ones I invested when the market is up.

Keep you investing simple

Set and forget investing isn’t very sexy. In reality, it’s passive. Kind of lazy. But why not use it. The average investor isn’t equipped enough to understand all the inner workings of global markets and share prices. And if you think you do, then your kidding yourself.

The average investor picking stocks, buying and selling to “maximize returns” actually under-perform passive index funds. So why bother. Don’t you have better things to do than try to analyse company returns and P/E ratios?

I do.


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2 thoughts on “What to do in a Falling Market?”

  1. Really smart advice.

    Portfolio losses currently are just paper loses but become actual losses if you panic and sell now.

    The best thing you can hope for early on your investing career is a bear market as you are buying shares on sale. This of course is the worst thing to happen if you had planned on retiring soon as this is the dreaded sequence of return risk spoken of.

    The market has long historical data that shows, despite occasional drops, the overall trend is upwards.

    Reply
    • I’m glad you think so. Sometimes I think I might be stuck in my own information bubble where all the advice I read tends to confirm my own held beliefs. I genuinely do think shares are on sale in a bear market. Think I might do some simulations using historical data someday.

      Reply

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