A little over a month ago, in late February and early March, the stock market in the United States took an 8% hit in a little over a week, a very painful drop for anyone with a stock investment. For me, this was a rather nerve-wracking time, as it was the first time I had significant stock investments during a market hiccup.
Right around that time (March 2, to be exact), Ben Stein posted a column at Yahoo! Finance entitled Keeping Your Cool In A Shaky Market. In short, the article basically encouraged readers to not sell like madmen because of the market hiccup, and actually offered some encouragement to buy.
On March 5, I took Stein’s advice and bought into the Vanguard 500, an index fund that matches the S&P 500 tightly. I bought shares in the fund at $128.89 a pop on March 5.
Yesterday, the Dow closed at a new all-time high, which reminded me that I had in fact bought heavily into a broad index fund just a little over a month before, so I went and checked the current value of a Vanguard 500 share. $135.67. In other words, my investment based solely on the principle of “buying low” saw a gain of 5.3% in a little over a month.
This doesn’t mean that I would buy immediately in every downturn, but that I saw no real reason for the previous downturn. There really is no sector that is truly overvalued right now (except possibly housing), so why would the market take a burp like that? As Stein points out, the market isn’t always rational. I saw it as a 5% off sale in the stock market, and a month later, it’s back to where it was.
So what did I learn from this?
My general investment principle is “buy low, sell when I need to.” I see no reason to really deviate from that general plan, and it seems to be working well. I generally buy a small amount each month (dollar cost averaging), but when there are opportunities like the one early last month, I’ll buy more. I also have no intention of selling anything until there’s a reason to sell it.
Watch what you invest. I keep my eye on what I’m invested in; I even have a spreadsheet that contains a bunch of data on the S&P 500 that I look at on occasion to see if there’s anything odd going on (like one sector bubbling up). For the most part, the numbers on this sheet have been roughly the same over the last year or two, and there’s no sign of a big bubble anywhere like there obviously was in stocks circa late 1999 and early 2000. I basically keep this as a “check” so that when there are little hiccups (or even big ones), I can feel fine buying in in the wake of the downturn, like I just did.
Don’t sweat it if you make a mistake. In other words, if you need the money to survive, don’t dabble in the stock market. I love seeing gains, but I also know that even if the market utterly collapsed, I wouldn’t be deeply worried because of that loss.