The stock market experienced a wild ride over the past week. On August 24, 2015, the DOW dropped over 1,000 points at the open due to week economic news in China and also due to crashing crude oil prices. While 1,000 points sounds like a lot, it really amounted to a temporary 6% loss. By the end of the trading day, the DOW ended up down 588 points. At one point, the US stock market was down over 10% from its most recent highs. Our own investment portfolio lost over $15,000 in 5 days. A friend called me to ask if it was time to sell some stocks. Many Boglehead forum users made posts asking what to do with this stock market crash.
Panic was starting to set in for many people. Then on Wednesday, August 26, the DOW jumped 619 points. On Thursday, the DOWN jumped 369 points. On Friday, the DOW barely moved with a drop of 11 points. In those three days, our investment portfolio returned $8,500. We haven’t sold any of our funds. In fact, we put in orders to buy more shares at 10% off their normal prices. Remember that a 10% drop in the market one day, followed by a 10% rise in the market the next day does not mean that you are back to where you started.
I was thinking about writing a response to the latest market volatility and then I remembered that I have previously written about this very topic! Stock market drops are nothing new, they happen all the time. I wrote about staying invested back in October 2014 here. Everything I’ve said is still valid. I’ve copied and pasted what I’ve written below.
Staying the course
We have our investments exactly how we want them to be. We won’t be selling our funds. In fact, we’re buying up more shares on sale while we can.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Warren Buffet
Don’t try to time the market
The stock market will go up and the stock market will go down, this is a fact. The problem with trying to time the market is that it can’t be done reliably or consistently over time.
Research consistently finds that investors who buy and hold their investments end up with a lot more wealth than those who panic and sell when their investments start to lose value. Investors who sell in a panic tend to also be the type of investor that only start buying more stocks once the market starts to rise in value (and get much more expensive).
To truly properly time the market, you need to be right two times: when to get out, and then when to get back in. Making one, or both mistakes can be costly.
Research shows that typical mutual fund investors perform much worse than the mutual funds they invest in. This is because they tend to buy after a fund has done well, and sell after the fund has done poorly. Buying high and selling low is a recipe for poor performance.