This is going to be a fairly short post.
Quick sell all your stocks. The Dow dropped 666 points and the world is ending.
Obviously, I am kidding. Well not about the Dow dropping but about selling your stocks. I’m not in tune enough with all the economics of the world to understand exactly why it happened now (February 2, 2018) but I am a pragmatic investor and I understand, no wait, I expect, the market to correct itself when it runs hot for as long as the market has.
I just want to make three points about the following topic.
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Be fearful when others are greedy, and greedy when others are fearful.
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Leave some for the next guy.
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Bet what you can afford to lose.
So some of you may know the first quote already. Warren buffet said this and it’s a general statement which really means buy low, sell high. On the one end, when everyone is talking about something, maybe Bitcoin or weed stocks, you should probably stay away from it. And on the flip side, when everyone says that Apple is going down, they cancelled the iPhone X, you should probably see if this means a buy opportunity for Apple stock.
Most people know this, but behavioural economics teaches us that most people do NOT do what they know they should do. I typically don’t sell stocks, as most of my money is in ETFs, so for me, I look for opportunities when the market dips and corrects, to invest. This is even more easy in situations where interest rates are low so the opportunity cost of investing is almost not there.
Second point, leave some for the next guy. There is no real next guy but I think this expression is a good one. If you do reading about what people are saying this week about the market, the objection to investing right away is that, we might not be at the bottom yet.
I agree with this statement, however, I’m fine with that. If the market continues to drop, I am pretty sure it will rebound at some point and I will make up what I lost. What I don’t want to do, is have to monitor this situation. In other words, I’m okay with losing a few points if that’s the case, but I want to make sure that I put some money in while the market is undervalued. If you have a long term investment horizon, this is a pretty safe bet.
Tim Ferriss talks quite a bit about decision making in his book, Four Hour Work Week. One of his recommendations is to not stew over decisions to get a few extra percentage points. If you know the right general correct decision, just do it, and if it’s 80% right, you will make up for it by moving onto your next important decision.
Finally, bet what you can afford to lose. If you are reading this post, my guess is that if you invested $10K into an ETF today, and for some reason in two months, the market really crashed, and your money was only worth $8K, you wouldn’t even blink an eye. However, if you are close to retirement and living paycheck to paycheck, I wouldn’t give you the same advice. Another obvious piece of advice but should be stated nevertheless.
In conclusion, this correction is a good and healthy thing to happen to the economy. If it didn’t happen now, it would happen latter. For you HENRYs out there, take advantage and do something about it, and do something now. I was in a meeting this week at work where my boss made a comment about our company having great strategy but not so great execution and I think investors do the same thing. We know what we should do, but sometimes we don’t do it and afterwards we kick ourselves for it. Execution here is as easy as hitting the buy button.
Thanks as always for reading.
Henry Bill 