Rising interest rates! Uncontrollable inflation! Possible COVID third (or fourth) waves! Tech crash! Over valuation! The S&P 500 is still within 5% of all-time highs. However, if you’ve looked at any financial news lately, you’d think that the stock market is going haywire. It can be tempting to panic and abandon your investing plan with everything that is happening. I can’t begin to tell you how many people have asked me the past week about what they should do with their long term investing strategies. For some, selling might make sense. But for the vast majority, staying the course is the more prudent strategy.
In most cases, short term volatility won’t ruin your finances in the long term. In fact, volatility can work in your favor if you are regularly accumulating assets, since you get to buy shares at lower prices. If history is any indication, those who are still adding to their nest egg should actually celebrate when the stock market crashes.
Looking at the Fundamentals
Having said that, no one wants to see their portfolio go down. It’s easy to stay invested when stock markets keep going up in a bull market. However, those convictions quickly turn into fear when markets go down. If you don’t want to panic sell, then make sure you understand the fundamentals of your long term investments before market values gyrate. These are some big picture items that aren’t as impacted by short-term quirks in the market or an economic crisis. While these types of events can sometimes be big enough to affect even the most solid investments, you shouldn’t react with haste. A sound investment (with solid fundamentals) is more than likely to recover over time. Some of the fundamentals you can consider include the following.
- Disciplined company management.
- Ability to increase profits over time.
- Political situation in a certain country (especially for commodities).
Stay the Course
Looking at the big picture can help you ignore short-term blips. By focusing on the underlying factors that are likely to have a long-term positive effect on the investment, you can easily stay committed to your long term investment thesis. You can take a look at the fundamentals and decide, based on the big picture, what is most likely to benefit you in the long run.
There’s one important question to ask yourself when evaluating a falling asset. That is simply, “what, other than the market dropping, has changed?” If the answer is “nothing,” then think twice before changing your plan. It’s too easy to get caught up in the moment. Many investors make the mistake of thinking that short-term market drops are “forever” kinds of things. Sometimes, it helps to take a step back. Remember to look at the big picture. Remove yourself from the moment to look at what might be the years ahead.
How Does the Investment Fit Into Your Long Term Plan?
You should also look at how the investment fits into your overall long-term financial plan. Does the investment still serve its original purpose? If the fundamentals are basically the same, and the reasons you bought the investment haven’t changed, then reconsider panic-selling. Remember that most people end up leaving money on the table by going in and out of the markets. In order to be right, you have to know when to get out (and when to get back in).
Many investors get out of the markets before the bottom kicks in. However, not many get back in fast enough before the next leg up. For market timers, they also have to deal with paying taxes. Short term taxes are much more costly than long term taxes. Remember that before you jump ship.
Be Willing to Make Changes to Your Long Term Investments
If you think about it, getting out might actually derail your long-term financial plan. Look at your overall plan and how stock market investing fits into it. Review the reasons you chose a fund, stock, or bond for your portfolio. If those reasons still apply, don’t be so eager to dump the investment just because there is a market setback.
On the other hand, sometimes an investment just doesn’t fit into your investment plan anymore. I have a friend who bet big on a genomics stock last year. His gamble paid off handsomely. He’s made more money with that one stock in a year than what he could realistically save in a few lifetimes. It makes sense for him to sell his holdings, even though he’s still really bullish about the future of the company. He can already retire early with what he has accumulated, so why turn those gains into cold, hard cash?
Sure, staying invested with that company might mean even more riches down the road. But what is something changes? Even if it doesn’t, staying invested could mean a severely reduced standard of living in the meantime. His stock pick gained forty-fold last year. Then it was cut in half in the past month. He’s already won, so there’s no need to keep betting.
It’s not like he is banned from investing in the markets by selling. He can still move his money around. Maybe he stumbles upon another potential big winner. Or maybe he just wants to reduce his future risk by sticking his his money in index funds instead. Staying the course is one thing, but making smart moves to get paid is important too.
The Bottom Line
At the end of the day, you need to consider your long term financial plan when investing. Protecting your financial future should be your number one priority. Yes, your plan may need to be tweaked from time-to-time. For a select few, (like my friend or those early $GME buyers), selling everything may be prudent.
For the vast majority of us though, making a complete investment overhaul based on a short-term market depression isn’t the best idea. After all, with all the volatility, what happens today could suddenly be reversed tomorrow. You probably don’t need to quit working for another 15, 20, or 25 years. Maybe longer. So consider the big picture. Even a year or two of depressed market conditions won’t matter in the long run. Historically, the stock market always rises in value. Don’t allow temporary problems to influence you. That’s just a recipe to keep buying high and selling low.
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