So you want to invest in stocks but you are nervous. You know it is the right thing to do, but watching the ups-and-downs of the market each day and listening to the commentators just keeps you on edge. How do you save for retirement but still sleep at night?
In a previous post I went into the worst mistake a 20-something can make, which is not investing in equities while you are young and able to sustain the gyrations of the market. Even if you are a great saver, if you put all of your money into bank CDs and don’t take advantage of the high inflation-adjusted growth rates of equities you are really missing out. Worse, the likelihood of saving enough to enjoy a comfortable retirement if money is kept in the bank is very small.
That said, many individuals find it difficult to deal with the changes in market value experienced when invested in stocks. Using the “river analogy” I commonly use, it is like white water rafting. Some enjoy the excitement of the tossing and turning, while others would rather be floating on a placid lake. Even if you know you need to get on the river to reach your destination, there is understandable timidity in the lake-types. The secret to getting over this fear of the markets is to develop the correct mindset for investing.
Here are several ways the timid can deal with the turbulence of the markets:
1. Look at the companies and not Mr. Market. Mr. Market is a fictional character created by Benjamin Graham, a famous investor who was a mentor to Warren Buffett. Mr. Market is always out there calling out prices for things. The prices he calls are due to all sorts of factors and can vary wildly from day-to-day or minute-to-minute. To see how wild Mr. Market can be, look at his calls for Aflac stock: ( http://finance.yahoo.com/q/bc?s=AFL&t=5y&l=on&z=l&q=c&c=) In 2008 Mr. Market declared that Aflac Stock was worth almost $70 per share. Three months later, he declared it worth less that $15 per share. Six months after that it was worth almost $60 per share again.If one had been paying undue attention to Mr. Market and holding Aflac stock, one would have thought the world was coming to an end and sold out in panic in January of 2009.
A calm look at the fundamentals of the company, however, would have painted a very different picture. One would have seen that the housing crisis, while it might have some effect on the company’s ability to sell insurance policies, really wasn’t that big a factor. Also, while the company’s investments may have taken a bit of a hit in the stock market downturn as well, there was nothing critical that could have happened that would have caused the company to lose that much value. The investor who was looking at the fundamentals of the company would have been buying shares hand-over-fist at less than $20 per share and made out well once Mr. Market started calling better prices. Mr. Market is often driven by fear and greed. Those who follow Mr. Market will sell at the bottom and buy at the top.
2. Bury your head in the sand. Believe it or not, the nimble trader who is constantly watching the market and jumping in and out of stocks will actually do worse than the individual who just buys stocks and forgets she owns them. If you can’t stand to see the changes in account value, just don’t look. Maybe glance at the statement once in a while and see how things are progressing. If what you see worries you and causes you to freeze like a deer-in-the-headlights, it’s perfectly fine to just drop the statement in a drawer and wait for the next one. Once the damage is done, there is no reason to worry about it. If you move out of stocks there is no way you can regain the former balance.
In investing, time is your friend. Witness how those who panicked and sold off in 2009 would have been far better off if they had just ignored their accounts since the market recovered all of the loss over the next year-and-a-half. Often, the best action to take is no action.
3. Think of yourself as a partner. Looking at a portfolio as a bank account, one would get nervous to see the account balance drop from month-to-month. Instead of thinking of your stock account as a bank account with a balance, think of yourself as a venture capitalist who is funding various ventures you feel will do well. You understand in doing this that some of the ventures will not work out, but those that do will more than make up for losses on those that don’t. Also, you aren’t interested in the results from any one quarter or year. You know that there will be some bad times along the way, as there are with any business, and it will take time for profits to grow. As long as the company has a good concept and is executing it well, there is no reason to move money out.
Note that this same philosophy can be used with funds rather than individual stocks. When you’re buying an S&P500 fund, you’re buying 500 large-cap US stocks. If there are a few bad quarters in the economy that cause the price of the index to drop, that does not really matter. You are holding interests in a substantial portion of the American economy. Unless the entire US economy collapses, businesses will recover and grow again. If you own a large-cap fund, a small-cap fund, and an International fund, eventually one of them will grow and provide a good return. You just need to sit back and lett all of those great entrepreneurs work for you.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing