The Independent Investor: How to Handle a Pullback
The stock market is in turmoil. Several hundred point swings in the Dow and other averages has investors on edge. The indexes are suffering 1-2 percent point swings per day. How are you dealing with it?
Over the last several months, I have written several columns preparing you for this day. I thought it might be useful to give readers a refresher course on coping. Here are some useful tips on avoiding that worst of all reactions—selling on the lows.
Number one: do not check your portfolio. The more often you do, the greater the probability that you will panic and sell. Every time you check your investments in a freefall decline like this one, you will feel terrible. The only way you can stop the pain (you will say to yourself) is to sell. Don't do it.
You see, we humans are really not built for investing. Our primal instinct when we face danger is to run. That fear and flee response has been saving our butts ever since the first sabre-tooth tiger chased us out of our caves. But putting some distance between you and that predator doesn't work very well when it comes to investing.
We are more comfortable thinking in the short term. No never mind that stocks may come back next month or next quarter, most of us can't take our eyes or our minds off what happened today and what may happen tomorrow. How many of you remember the back-to-back declines we had in the first quarter of 2016? Not many, I would wager.
For some, this is an opportunity. Given that many of us receive bonuses in the first quarter of the year, we may have some cash sitting on the sidelines. This is the kind of opportunity that most investors hope for. Baron Rothschild once said "buy when the blood is running in the streets." Now is your chance to put that money to work. Buy a little on every down draft and be patient.
But doing that takes courage and willpower. You have to fight that instinct to simply husband that cash and "wait until the market recovers," but by then it will be too late. Do it now when panicky traders are giving away stocks at great prices. There is nothing fundamentally wrong with the markets or the economy. We are simply experiencing a long-overdue correction in stock prices.
But the markets have never experienced these kinds of declines, you might say. The headlines may scream "1,000 point drop on the Dow" but they fail to remind us that the Dow has gained much more than that over the last year. By the time the dust clears, we will have discovered that the total percentage loss of the main equity indexes will be no more or less than what we normally see in corrections.
As I have written many, many times before: this too shall pass. You trusted me then, so I am asking you to trust me now. You won't be sorry you did.