I had originally written a nice, long article about why the stock market downturn of the last week is nothing to worry about – and also about how, just this morning, I increased my holdings in index funds (namely, the Vanguard 500) by about 50% (it’s true!). Just as I was about to post this article, however, I happened to read Ben Stein’s article today on the same exact topic, entitled Keeping Your Cool in a Shaky Market. I’ve waxed ecstatic about Ben Stein’s writing in the past, so I thought it might be more interesting if I instead took out some interesting points from Stein’s article and added my own thoughts to it.
Don’t panic. Panicky behavior, especially panicky buying and selling, accomplishes absolutely nothing. Smart investors never buy in a rush or sell in a rush. It’s always worthwhile to think, to consider, and to do research. Only madmen and stock traders and speculators panic. Don’t do it.
Any time you do anything in a panic or without clearly thinking it out, whether it’s investment-related or not, you usually end up regretting it. If you’re thinking of selling right now, breathe in, breathe out, and think about it.
Keep plenty of cash on hand at all times. It’s very hard to think rationally about stocks if every dime you have is in stocks and if the market is falling fast. The risks of annihilation are so great at that point that panicked selling seems like a smart option … As I write this, I realize I probably should’ve had even more cash reserves. I easily have 18 months’ worth of cash, and it’s the cash I think of when I’m worried, not my endless printouts of stock.
In other words, Stein has an eighteen month emergency fund. I was happy when my emergency fund crossed the three month line. This is just another indication that an emergency fund is a key part of anyone’s financial plan, whether you’re rich or poor.
Stocks don’t always fall for a good reason.
With the exception of a few Asian stock markets that were due for a big downturn (healthy stock markets don’t jump 100% in a year, no matter what), none of the ones in the West (like the NYSE and London) have any reason to be going down other than as a panic response. There’s nothing that concretely indicates that there’s something wrong in the economy right now.
Have plenty of cash.
Buy when others are selling.
And, one last time, be patient. Do you think Warren Buffett was selling last week?
In short, I agree completely with Stein that this stock market “burp” is nothing more than an opportunity for people to get in and make some cash. It’s a number of people pulling their money out of stocks entirely because an Asian market got too high. Thus, you can take advantage of this move by buying in right now and riding that rebound.
This is exactly what I did – I bought in on the S&P 500 today, even though the S&P 500 is down almost 5% since last Monday. Why? I may have lost some money in the last week, but what I see is an opportunity to buy something at 5% off that I was comfortable having at the higher price just a week ago. To me, it’s like hitting up a sale at the grocery store: I can get something good at a discount at the moment.