I said it in my last post and I’ll say it again: this market SUCKS. Another day, another triple-digit Dow loss.
Being an investor in a market downturn is like being a Tennessee Titans fan. After a while you get used to the losses, but it doesn’t make them less painful.
But at least I’m smart enough not to risk money on the Titans.
Have we entered a true bear market? Are worse losses coming? No one knows — especially those who say they do. Those people are trying to sell you something, and what they’re selling will likely lose you even more money.
Market dips cause investors to make terrible decisions out of fear. And it doesn’t help that bad news brings the charlatans out of the woodwork, all of whom are eager to prey on your fear.
In fact, there are some things you should avoid altogether during a market downturn. Stay away from the following and you’ll get out the other side unscathed.
Newspapers and TV
Specifically, cable news is the worst thing you can consume when the market is down. Mass market newspapers aren’t far behind.
Remember, they get paid not on how accurate their news is, but on viewership and the number of papers they sell.
And what kind of news makes people tune in and buy newspapers? You guessed it, bad news. Excepting terrorism, no type of bad news sells more papers than economic bad news.
The media has a vested interest in projecting doom and gloom. If they can make a compelling case the Dow will drop to 5,000, they’ll do it. Because people can’t help but pay attention, the same way drivers crane their necks to gawk at a six-car pileup on the other side of the interstate.
I’m not advocating that you remain purposefully ignorant. But choose your sources wisely when catching up on current events. Websites such as Investopedia, MarketWatch, Forbes, and The Economist offer educational and informative financial content without the histrionics.
Though it doesn’t yet offer the breadth or depth of the above sources, this blog is another reference I hope you’ll find useful. At the very least, I promise I’ll always strive to provide value, and never dangle clickbait in front of you to increase my page views.
Short Selling, Derivative Trading, and Other Risky Trading
Short selling and derivative trading are two methods, both fraught with extreme risk, that some people use to try and make money when everyone else is losing it.
Yes, highly skilled speculators exist who’ve made fortunes betting on market downturns. The Big Short follows several traders who cashed in big on the subprime mortgage fallout. I enjoyed the book and the movie, but I’ll never write an option or short a stock.
Because here’s the thing, almost every get-rich-quick story from a market crash involves two elements: preternatural technical analysis skills and a ton of luck. I’m not a math genius, nor do I have great luck — I usually end up with the airplane seat between the crying baby and the 400-pounder. So I stick with boring old buy-and-hold investing.
If you think you have the stuff and want to gamble on the market continuing to fall, go for it. But understand that’s what you’re doing: gambling, not investing.
The intricacies of derivative trading and short selling are beyond the scope of this post, but Investopedia has some good primers if you want to familiarize yourself:
Otherwise, just know that both trading methods are highly speculative and offer limited upside with unlimited downside.
In a normal stock investment, as I’m sure you know, you win when the price rises and lose when the price falls. But the lowest the price can fall is to zero, and thus the most you can lose is the amount you invested.
When you sell a stock short, you win when the price falls and lose when the price rises. While it can only fall to zero, it could theoretically rise to infinity. Imagine if you had shorted Apple during the company’s dark days in the ’90s, right before its spectacular turnaround. Ouch!
Your Sketchy Cousin or Brother-in-Law
We all have a shady Cousin Eric. Every Thanksgiving he’s touting a new investment scheme that’s going to make a fortune, and he can get you in on the ground level.
Eric is a master at dodging questions about what happened with last year’s scheme. The Yugo parked two blocks from Grandma’s house? He doesn’t know whose that is, or why his doppelganger drove up in it an hour ago.
If your family’s Eric has a particularly impressive silver tongue, his pitch might be enticing during a year when everything else in your portfolio seems headed for hell. But if you’re reading this blog, you’re probably smart enough to know deep down that Eric is bad news.
If you find yourself getting sucked in by Eric’s slick pitch, extricate yourself from the situation. Grab a seat next to Uncle Jim and rehash your yearly Peyton Manning/Tom Brady debate.
Portfolio Tracking Apps
Chances are, your brokerage offers a smartphone app that lets you track your portfolio with a single tap of the screen. It’s incredible what we can do these days with modern technology.
The smartest thing you can do during a bear market is delete the app from your phone.
First of all, it’ll drive you crazy. Obsessively checking your stocks to see if they’ve ticked back up is tantamount to checking your phone every three minutes to see if the girl from last night texted back yet, or repeatedly logging into Tinder looking for a match notification from that cutie you just right-swiped.
It won’t make what you’re hoping for happen any faster, and it could cause you to make a terrible decision — such as selling off stock during a dip, or texting yet another picture of your abs in the bathroom mirror.
If you’re a buy-and-hold investor, which is what I advocate, you don’t need to check your portfolio more than quarterly. Investing is a long-term proposition. The daily (and even monthly) gyrations of your portfolio have little to no bearing on 10 to 20 years from now. Consider how investors freaked out during the Black Monday crash in 1987. The ones who left their money alone and went about their business were flush with cash 10 years later.
Making Big Moves
Savvy investors know that a market downturn is not the time to sell a bunch of stock. Chances are, you’ll lose money and miss out on the subsequent rebound.
But that doesn’t necessarily mean you should dump a bunch of money into the market all at once, either.
In this post I talk about dollar cost averaging. This strategy is effective in any market, but I especially like it during periods of volatility.
The concept is simple, the execution simpler. Dollar cost averaging invests your money in equal portions at set intervals over a period of time. If you have $12,000 and want to dollar cost average it over a year, you would simply invest $1,000 per month for 12 months.
In a fluctuating market, dollar cost averaging guarantees you buy more shares when the price is low and fewer shares when the price is high.
For example, say that shares are trading at $25 this month. So your $1,000 buys you 40 shares.
Next month, the share price falls to $20. Which means you get 50 shares for your $1,000.
The month following, the price shoots up to $40. At this price, your $1,000 only pays for 25 shares.
The average share price over the three months is $28.33 (($25+20+40) / 3). But you paid less than that. You got 115 shares (40+50+25) for $3,000. That means you paid an average share price of only $26.08.
Thanks to dollar cost averaging, you saved over $2 per share. Best of all, you didn’t even have to think about it. Just set it and forget it!