I don’t know if you noticed, but it was the end of the world last Monday.
From Tokyo to New York, stock markets plunged. Blood-red charts filled the TV. Investors panicked.
In the middle of summer! There we were, busy planning the next barbecue or convincing our kids to wear sunscreen. And then bang! The markets sank, much like a stone from one of those poorly thrown ricochets that I specialize in.
The decline has partly been absorbed. Nobody knows what’s coming.
Not long ago, this uncertainty would have made me panic, too. Is it time to sell? To be more defensive? To find more stable investments?
Humans are like that: our reflexes push us to react.
But our reflexes make us very bad investors.
Here are six tips to help you relax despite market upheavals.
No rain, no rainbow
Every time it happens, a stock market meltdown is scary. We become poorer without even having had the pleasure of spending! In the worst cases, we feel like we are on a runaway train without a driver. The desire to get off can be powerful. But no one knows the future. The markets can continue to fall or they can resume their upward march. This uncertainty is at the heart of the exceptional returns of the stock market, which have been 5% higher than inflation on average for decades. Over the past year, the Canadian stock market has risen 10%. In the United States, the increase was 18%. As a disaster, we have seen worse.
Fear is an ally
Stock markets work a bit like a seesaw: The higher they go, the lower their expected long-term returns. The lower they go, the higher their expected long-term returns. Ironically, it’s after a good fall, when everything has been in the red for a long time, that the skies are most benevolent for investors. Yet our brains are urging us to seek the opposite. “Extreme fear creates an opportunity to add capital at lower valuations,” Charlie Bilello, chief market strategist at investment firm Creative Planning, wrote this week. “When it comes to investing, it’s not greed, but fear that’s your friend.”
Do not check your investment balance
OK, this is a bit of a silly tip, but it works. For years, I’ve only checked my investment balance infrequently, and only on bull days. Bear days? I forget I’m an investor. I do something else on those days, no matter how long they last. My investments are on autopilot anyway, so my attention or inattention doesn’t change anything. This makes me feel like a genius, because every time I check it, my account is in the green.
Diversification shines
Diversification shines during a stock market rout. For example, over the past year, several readers have told me that they were investing heavily in technology companies, which have only been going up. Over the past month, this sector has been battered: the NASDAQ index is down 9%. But a diversified portfolio of Canadian, U.S., international and emerging market stocks like the Vanguard All-In-One Fund (VEQT) is down only 2% over the past month. And a balanced 60% stock, 40% bond portfolio like the Vanguard All-In-One Fund (VBAL) is where it was 30 days ago. Nobel Prize-winning economist Harry Markowitz used to say that “diversification is the only free solution in investing.” We would be crazy to do without it.
Buy when you have the money to do so
Maybe you have money to invest, and you’re wondering whether the correction will be long, medium, or short? I wish I could tell you. But I can’t: even Warren Buffett has said for decades that he can’t predict the direction of markets in the short term. Buffett predicts that the market will go up in the long term, and that’s all he cares about. About half the time, the stocks we buy will fall below our entry point. This is not a tragedy. Just a fact of life that we must learn to ignore. “He who doesn’t own stocks when prices are falling, won’t own them when prices are rising,” said stock market expert Andre Kostolany.
The ideal entry point for investing is a mirage. It only becomes obvious after the fact. Statistically, the best time to buy is when you have the money to do so. If investing a large sum at once scares you, you can set yourself a schedule. For example, invest a sum on the first of the month for six months, or for a year.
To go backward is to go forward
I’ve been reading your messages for almost two years. There’s a theme: You want to see progress. You want your investments to be higher today than they were last month, or higher this year than they were last year. Up is success. Down is failure, a sign that something is broken, that you need to get off the handle, get to work, and make a change.
I understand that reaction. But there is no such thing as getting rich in a straight line. Mark Zuckerberg saw his fortune collapse by 73% in 2022. No matter what you think of Mark Zuckerberg, it must not have been a pleasant year. Yet Zuckerberg is 50% richer today than before the collapse. What did he do? Nothing. Going backwards is not abnormal. Going backwards is progress.
Turn off the TV. Take a walk. Pour yourself a nice glass of lemonade. Call your mom. Text your kids a silly emoji. Try to improve your ricochet shot.
Life is too short to worry about the stock market.