📉 When The Market Goes Down What Do you Do?
The stock market took a dip this week. The Dow Jones dropped over 1,000 points, and right on cue, the media went into a frenzy.
The financial media is not your friend. They aim to do one thing: get clicks.
The problem is, for the long-term investor, this is not good because to get clicks, they have to create emotion. Unfortunately, in finance, that emotion is fear.
Warren Buffet had a mentor named Benjamin Graham, who used to explain the market in a very simple way. He called it Mr. Market.
Ol’ Mr. Market is an emotional fellow. He will react based on current events, politics, or any fear or panic the media can muster up.
This, my friends, is not the example we want to follow.
Uncle Warren has many great quotes regarding the market taking a dip. He has some of the best investing quotes of all time, one of which is:
“You must be willing to invest through thick or thin, but especially through thin.”
This tells us that we must be willing to invest when the market is down and when the market is up. Otherwise, we are just gambling.
But my favorite is:
“In the short run, the stock market is a voting machine; in the long run, the stock market is a weighing machine.”
In the short term, the stock market is just a popularity contest. It’s a place where the news of the day will cause you to panic and accidentally sell.
This is a mistake. Reacting to market fluctuations is similar to going into surgery just because you have an ant bite. It’s a small, short-term blip.
Market dips happen. Recessions happen. How you react to them is where wealth is built.
People who sell usually don’t perform well long-term. In fact, I would argue it’s a multi-million dollar mistake to sell your stocks at the wrong time, even if you don’t have much money invested.
This chart shows exactly why that is:
You can’t predict what the market will do next. Selling because of a correction or drop in stock prices is you saying to the world, “I have a crystal ball, and I know what will happen.”
Newsflash: you don’t. Nobody does.
And for those “financial gurus” who say they do and read this newsletter, shame on you. You are part of the problem.
What should you do?
Here is a list of what you should do when the market dips:
- Buy more
- Nothing
That’s it. That’s the whole list.
This is easier said than done for some, so let me help you master market downturns.
Stop consuming media.
The media will do more harm than good when the market has down days (or weeks, or months, or years). Again, they are not your friends. All they want is to create an emotional response to get your click or view.
Instead, read more books about investing. I highly recommend anything by Warren Buffett or Charlie Munger, in addition to reads like The Simple Path to Wealth, Just Keep Buying, and A Random Walk Down Wall Street. All will show you that wealth is built by waiting, not taking action.
Stop looking at your portfolio.
You know what doesn’t feel good? Opening your phone to see that you have lost thousands, if not tens of thousands, of dollars in a day.
So the solution is simple. Don’t look. Sports fans are terrible at this. When our favorite team is playing and they are taking a good ol’ fashioned whooping, we continue to watch. We (I) just become more and more angry with each ticking second.
This is fine for sports; this is terrible for your wallet. Stop looking.
Fidelity did a study that found that their best investors with the highest returns were dead.
Take the key (password) to your portfolio and swallow it whole.
Give yourself some zoom-out therapy.
When in doubt, zoom out.
You need to constantly remind yourself that this is temporary.
How? By pulling out your trusty stock market app, setting it to the longest time horizon, and smiling from ear to ear knowing that the days will be long, but the years will be short.
But heck, you’re reading right now, so let me do it for ya:
Ain’t she a beauty? Just up and to the right.
The market will change on a daily basis. We only care about the market on a decade basis.
Automate your money
If you automate your money, it tends to help remove all the emotion from investing. Why? Because it gets you out of the equation!
We are our own worst enemies when it comes to investing. The last thing my portfolio needs is my big, clunky fingers pushing that buy button. Instead, I automate every dollar I invest into each portfolio.
It looks something like this:
- HSA: 8% of max each month.
- Roth: 8% of max each month.
- 401(k): 8% of max each month.
Then I let automation do its thang, ya feel me?
“Did this guy just spell ‘thing’ as ‘thang’?”
You bet I did, dear reader, you bet I did.
I leave you with some final words of motivation. Invest like dead people and do nothing.
