For those of us who are focused largely on investing rather than high-speed trading to grow our portfolio over time, we must constantly remind ourselves that our time horizon is not to maximize our net worth daily, weekly, or even monthly. We are on a long journey of growing our money reliably and predictably over time.
When we see high volatility in stock markets as we have recently it can be tempting to try to start trading swings or try to perfectly time our investments to buy at the very bottom and sell at the very top. This is not typically an effective strategy for most of us.
Try not to get distracted by hindsight evaluation of “missing opportunities” where you “could have” invested at the bottom. Market bottoms are seldom formed in a day. What looks like a cheap stock today, may be even cheaper tomorrow or in 6 months.
Stay focused on long term strategy. If you are well positioned with cash or cash equivalents available in your stock portfolio, start identifying what stocks you may want to buy and at what levels. Establish a plan with a specific time frame (e.g. 1 year, 5 years, 20 years). Then identify for those stocks you want to buy… at what levels you want to cost average your way in as the market may continue to go down or may level and go back up.
It is ok to not have all your money in the market even when it hits bottom. Part of a good strategy is capital preservation… not losing what you already have. And a foolish mistake can wipe away a lot of prior gains and turn them into a loss in a volatile market.
As an example from the past, let’s consider some round numbers for the S&P 500. The market highs were around 2100. If you put in all your cash or cash equivalent to the index when it declined 5% to 2000, you may have felt good at the time, but probably less so when it moved lower after that. It may be even lower in 3-6 months.
On the other hand, if you have mapped out a strategy to cost average in and bought some at 2000, knowing you have more investment capital to invest if it continues to decline, you are probably feeling ok about your decision. You may want to keep buying in portions as the market declines 5, 10, 15 or 20%. If it never makes it down to your final “buy” targets… that is fine. You have missed an opportunity but not lost any additional money. In fact, that is good for the rest of the investments you already made.
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