The stock market has been down about 5% in the last week. Crude oil is crashing. Dubai stocks are crashing. Asia stocks are crashing. Europe stocks are crashing. The Dow dropped over 330 points in one day last week. Our investment accounts are down a little over $5,000. Is it time to sell all of our index funds and start hoarding cash?
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.
Hold on, it could be a bumpy ride
If you are not ready to ride out the market’s volatility, you should not hold a large portion of your assets in stocks. This being said, the stock market always goes up over time.
The stock market does just as well whether you are out of the market as when you are in it. As it turns out, the best returns on the stock market have happened in only a few months. The returns on the very first few weeks of a market recovery produce a large proportion of the total gains that will be experienced.
If you’re sitting out on the sidelines of the stock market waiting for the right time to get back in, chances are that you will miss your opportunity.
Simply buying and holding your investments is more likely to outperform market timers with a lot less headache along the way. Your investment losses will recover. When the stock market is losing money, this is your time to pick up more shares at cheaper prices. Stocks can be volatile with up and down swings, just like a roller coaster. When you’re riding a roller coaster and you get scared, you should hold on tight, not jump out of your seat.
We will stick to our plan.
We are investing in a simple Boglehead 3 fund portfolio. Our current asset allocation is made up of 90% stocks (70% domestic stocks, 30% international stocks) and 10% bonds. Our 401K funds are set up to mimic Vanguard’s Total Stock Market index fund. This portfolio is easy to manage and we sleep well at night not worrying about the volatility of any individual stock.
With our 3 fund portfolio, we essentially own a piece of over 3,600 US stocks (like Apple, JP Morgan Chase, Google, and Chevron), over 5,500 International stocks (like Nestle, Toyota, HSBC, and Samsung), and over 6,300 individual US Bonds.
Invest for the long term by dollar cost averaging
With dollar cost averaging, you invest equal amounts of money regularly over a specific period of time, instead of all at once. When you dollar cost average, you buy more shares when prices are low and less shares when prices are high. Investing this way will reduce the chances of putting all your money in just before a market crash. It will also allow you to stay invested if the market does crash.
When you are investing for the long term (over 10 years), it doesn’t really matter if you are buying at the exact bottom of a market crash. Any stock market crash will be followed by a recovery. Staying invested will keep your portfolio part of the rebound.