We are not even half way through the month of August and market madness is in full effect! In just over a week I have lost $30k in the down market only to regain most of it in over a couple of days and then lose some of it again before the weekend.
Call me crazy, but I actually enjoy watching this madness. The overreactions followed by panic selling is a great study in human emotions. As I have said before, it really doesn’t matter if you are in it for the long term. These are paper losses unless you sell, which I personally will not do. I also wouldn’t advise watching closely if you don’t have the stomach to see your savings plummeting before your eyes.
Every time we enter a volatile period in the market we should think about one word, opportunity. It’s an opportunity to put some cash to work if you have been holding out. It’s an opportunity to use dollar cost averaging to average down. If you have a regularly scheduled monthly investment strategy this automatically takes care of itself. It’s also an opportunity to evaluate your portfolio to see how it’s holding up in this type of market. If you’re not liking what you see, or you are out of your risk comfort zone, you might want to consider making some adjustments before a prolonged down market comes along. After all, everyone is happy and can make money when the market goes up. But how do you handle things when the market turns down?
I’m a stand pat type of investor. I watch the markets pretty much daily and monitor my portfolio. I also hold onto a good amount of cash money for a couple of reasons. First, because I love having cash! You never know what each day brings and emergencies happen. Another reason I like to have cash on hand is for opportunistic buying. Dollar cost averaging is the great equalizer in the investment game. I have used automatic investment options to continuously purchase shares of funds at different price levels more my entire investing life. But what about when there is a serious overreaction and massive panic selling? If you read this blog you might remember my favorite quote from Barron Rothschild;
“The time to buy is when there’s blood in the streets … even if the blood is your own.”
One of the best ways to turbo charge future returns in my opinion is to jump in when everyone is running out. Sure, you might take a short term hit because trying to time a market bottom is a fool’s errand. But in the long run you will recover your loses much faster and extend your gains further.
We saw a small glimpse of what can happen already this month. The market was turning down slightly and then a panic set in and the market tanked. By the end of the week, a good amount had been recovered. Let’s face it, there are folks out there that just can’t stomach a down market and feel the urge to get out while they can. Then there are folks who are waiting patiently for those people to bailout so they can add to their position and ride the recovery to larger profits. History has shown that markets recover their loses, and more, over a long period of time. This has been proven time and time again.
Now I don’t suggest people just jump in head first with every last dollar they have in hopes of huge financial rewards. Carelessness is not a smart investment strategy. But I do think it’s wise to follow a down market and find a comfortable entry point to average down your position. I’m not looking to time the market bottom, but I am paying attention to the movement and reactions to news releases. If I add to a position today and it goes down more next week, so what! This is a long term game we are playing.
This is what I will be looking to do should the market turn south in a panic. These recent movements appear to just be news reactions and not the start of a prolonged downturn. The markets have been going up for a long time and corrections can be healthy for a continued run up. But we always need to be ready for that downturn.
How are you handling the markets swings? Let me know about your strategy or plan to deal with rapid changes to create long term gains in the comments below.
Thanks for reading…………