|The S&P over the last week, notice the sharp decline on Friday|
By now I’m sure you’ve already heard about the Brexit. In a surprising outcome, Britain has voted (not unanimously) to leave the European Union. In the eyes of the financial world, the U.K. did the unimaginable. Financial markets hate uncertainty, and this is why global stock markets have taken a small drop in value. For those keeping track, there was an estimated $830 billion in losses estimated in the United States markets and $2.1 trillion in losses across global markets on Friday, June 24th. That’s a ton of money lost, for those that decide to sell. The value of our investment accounts dropped by more than $8,000 in one day! Ouch.
All over the financial news you are going to hear about how “in the red” stocks are. News outlets are going to use big, scary words like “nose dive, slammed, plummeting, gruesome, catastrophic, blood bath, and meltdown” to describe the market. The DOW dropped by over 600 points on Friday. These headline terms are designed to grab attention and cause panic. This may continue for days, weeks, months, or even years.
If you’ve been investing for a while, or even if you go back and look at past trends in the stock market, you will notice that stocks are volatile. Values go up, and values come down. The best action to take has always been the same: stay the course. If you’ve watched financial news, you will notice that they always like to exaggerate headlines. The DOW dropping by 600 points sounds a lot scarier than the fact that a 600 point drop is only a 3.4% drop in value.
Studies consistently find that the more you trade stocks, the lower your final outcome. If professional traders can’t get market timing right, how can the average investor? They can’t. If you’re in the market for the long run, short-term drops in market value shouldn’t scare you. In fact, you should be motivated to pick up extra shares while they are on sale. I don’t know about you, but I feel a lot better investing in the stock market when prices are coming down, than when prices are at their peak highs. Selling your shares when the market is down only locks in your paper losses and guarantees that you make the biggest mistake when it comes to investing: buying high and selling low.
The S&P over the last 2 years. It's been a wild ride, but notice how the recent drop looks just like normal volatility.
We are investing for the long term. In the long term, stocks go up in value. In the long term, market timing doesn’t have any significant effects. If the market continues to drop in value over the next few weeks, there will be great buying opportunities. For those that haven’t opened up a retirement or investment account, now is a great time to do it. For those that haven’t increased their 401K contributions, now is as good a time as any. That being said, I still don’t recommend trying to time the market. This small dip could be the beginning of a much larger drop. 3% drop is nothing. I’ll start paying attention when we hit a 20% drop. Stay the course, but don’t double down.
There is a great Brexit megathread discussion on Reddit here.
You can read about what Vanguard thinks of the Brexit here.
There is plenty of good discussion over at Bogleheads including this thread here.
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