Do you hear that? Absolute silence… No hype over twitter on fad stocks or latest finance trends, no obsession on financial news media outlets over markets going to infinite levels, and no one bragging about how well their portfolio has been doing compared to the index during the fiscal 2022 year and advocating for some obscene alternative investment to venture into.
It is relatively quiet in the world of financial and investment optimism, but the noise has seemingly shifted towards dark and gloomy days with the focus on inflation, commodity prices, labor shortages, and consumer good supply deficit. At the time of writing this article, it remains to be seen whether an economic recession is around the corner or is already upon us, or whether it will remain a technical one with most major indices having dropped >20% from their all-time highs achieved near the end of 2021. It can certainly feel stressful to ensure your household budgets and finances are in order and balanced to counter higher costs of debt (interest rates) and rising prices of goods. However, regardless of the catalyst (pandemic or not), economic cycles are normal and as there are times of economic expansion and prosperity, there are unfortunately times of suppressed buying power, reduced investor sentiment, and investment losses with a drop in equity prices. As much as regression is a normal “thing” of an economic cycle, it still challenges our emotions when it comes to financial decision making.
The preparation and good habit building that was done during a time of economic growth and profitable market investments are put to the test during recessionary times and market declines. The ability to take advantage of market fear and equity price declines separates the responsible and rational investors from the irrational and short termism minded investors. Buying when markets are tanking across the board may seem like a moot action, but the benefits from those actions take time to materialize depending on how drawn out a market drawdown will be. Dollar cost averaging into your existing investments, whether it be market index funds and ETFs or individual stocks, is taking advantage of buying something you already own and own for a good reason (hopefully) on sale. I find myself scrutinizing my investments more during times of market downtrends and questioning why I own these companies. But the question I always ask myself is whether I would buy the stock at its current price. The answer is always yes, because I had owned it not too longer ago at a higher price and had no problem owning it then. If the answer to my question is yes, then why on earth would I consider panic selling it into a market meltdown? Timing the market is impossible, so rationalizing a sell decision to buy the entity back at a lower price is a fool’s game, and more often than not results in the investor buying the investment back at a higher price from which they sold it from.
If you are a long-time owner of Berkshire Hathaway and have owned it up to its run to $320/share and felt completely justified owning it then based on its fundamentals and long-term prospectus, why would you consider selling it at $288 just because it fell 10%? What would you do with the free cash once you sold it at $288? I have fallen for this common irrational decision making pitfall many times when I started investing, and it did truly feel liberating when I did so. However, when that sense of panic to sell kicks in, there’s no game plan and no long-term consideration of what to do after the irrational decision has been made. When you see the stock you sold starting to rebound, you immediately want it back, and again more often than not, you end up buying it back for a higher price than from where you sold it at. You’ve lowered your purchasing power thanks to human emotion.
Having as cash balance, or ample margin room for the more experienced investors, is always good because it offers an opportunity to take advantage of times when markets are falling. It’s easy to point in hindsight and identify when it would have seemed obvious to purchase stocks during a downtrend, but if an investor is cash starved, there’s nothing really to do but watch. This is also fine, but being cash poor misses an opportunity to buy new investments or dollar cost average into existing positions at lower prices. Increasing cash positions and waiting for an opportunity of a market pullback is a good strategy as opposed to using available cash balances immediately when they become available.
The purpose of this post was not intended to teach something new or revolutionary, but instead provide a reminder to readers that patience and discipline always pays off when investing. The investment approach of buying and holding, and dollar cost averaging in and slowly building positions over time, will always prove fruitful over the long term, especially for individuals who have the luxury of time. Individuals nearing, or in, retirement should have less exposure to markets anyway, and have a larger weighting to fixed income instruments to provide a steady stream of cash flow and remain insulated from market volatility.
Oh, and stock valuations do still matter… they always have. Market downtrends are always a humble reminder of that.
Figure 1: S&P 500 Index Historical Log Chart (June 19, 2022)