Something that I find is of constant surprise and very little discipline is continuing to invest while the market is going down. While there are certainly companies that go bankrupt or who do horribly and never recover, hopefully you are dumping them after enough time and reinvesting instead in better positions. However, when the whole market is heading down, it is the majority tendency to stop investing and this is wrong. Let me square this up a bit.
Only Invest with Money You Will Not Need in the Next 3-5 Years
You hear this a lot and it’s easy to let this get away from you, but this should be your basis. Because if you are putting money into the market today that you will need in a couple years when you buy a house or car or a college fund comes due, there is no guarantee that you will make money in that window nor that the positions you’ve staked are ripe for exit. Don’t lose sight of this.
And it’s totally fine if you get spooked during a reasonably significant or sustained downturn and you reduce your investments. Just don’t stop.
To explain let’s just take one particular stock, and I’ll use Rollins Group (ROL) as one I have invested in for the last several years and has done very well. Write to me if you want to know why I like this stock, as it is consistently rated between a C-D. But let’s say you start with ROL at 20 and it climbs to 25 over the course of a couple years and you are sitting on 25% gains. Then the market tilts or this business starts to go bad and you cough up all those gains and end up in the hole sitting at 17. And let’s also say you are a regular investor who puts in $2000/month like clockwork into this fund.
When it starts to slide and this remains a company you believe in, what you are saying with your regular contributions is that you are only willing to pay more for shares, but never less. Remember the market is perception, and if investors see something they don’t like about a company, that may or may not reflect its actual value. And if all those dummies undervalue this stock you like, you would be foolish not to continue to invest as its value hits 17 or 15 or whatever. You are picking it up for cheap. Now, when this stock gets back on its feet and cruises back up to 25, you have made way more money than the 25% you had from buying at 20.
Another piece to this is that buying constantly in the market helps diversify your positions in time. You buy when things are cheap, you buy when they aren’t, and you buy when it’s neutral. All of this provides protection from swings.
Yup, It Hurts
Again, if you don’t have the money to invest, it’s really going to suck investing WHILE the market is going down, as you lose immediately. And it hurts to put those dollars in and watch them wash away. But if you have perspective of time and you have patience, you know these are some of the most valuable dollars you will put into the market. And as you get smarter, you will begin to stack up cash waiting for down markets to pounce on.