John Heinzl wrote a humorous column in the Globe and Mail today entitled, 10 things the credit crisis taught me about investing. The part that made me laugh the most was the first lesson:
All stocks are risky, even the safe ones. You can buy the most conservative stocks, focus on the most recession-proof industries and diversify until the cows come home, but guess what? You’ll still get crushed when the market decides to roll over. Why? Because the stock market hates you.
Im sure his ten lessons were meant mostly tongue-in-cheek. But, seriously, if one is letting recent volatility influence them and shake their discipline (e.g. Lesson 2: Buy-and-hold, buy-and-schmold), then they perhaps shouldnt be investing in stocks.
The current stretch of bearishness has been extreme but investors have to realize it is part of the process. Stocks go up and they go down and one should only be in stocks if they have a long term view and can wait out the downturns. Money needed within five years should never be stocks.
It really does seem true that: People may read an investing book that tells them they can get an average 9% per year if they only buy and hold stocks over the long term However, when the market does crater, the actual experience turns out to be a lot different than reading about it in a book. Newspaper headlines are full of doom and gloom. The permabears get more air time and their theories of cataclysmic decline begin to look more plausible And so on: its truly a scary time, one that can even produce insomnia for some investors and waves of selling (from Why investors get burned, Jan. 17, 2008)
The thing to do is to stop checking the investment account. If your stocks are already down 30% to 60%, its too late to sell. Get busy with other things. The only reason to be watching stocks now is if you want to buy some bargains, do some trading, or rebalance the portfolio — otherwise get busy with work, family, etc. Put the market out of mind, unless it is to visualize what it will look like 3 to 5 years from now when the markets will likely be in love with you again.
For some thoughts on taking it a step further and actually increasing exposure to stocks, see Psyching up to buy.