The S&P is down 5% in a week. News writers are talking about the pending doom and gloom of the Chinese economy. Gold prices are falling through the roof. The Blue Jays have won 11 straight; they are going to the World Series. The world’s not right any more. It’s time to hide in a bunker with beans and bottled water. The pending financial apocalypse is coming.
All this news the past week has been there to scare the average investor. Those who invest emotionally and watch the stock market roller coaster up and down will have a hard time stomaching such a large decline that we experienced over the past week. People only see short term results, but the 9.7% year to date gain in the S&P was just a distant memory. The bar room chatter has already begun to swing from why I didn’t buy to why I didn’t sell.
The fact is, none of what is happening should scare you. You shouldn’t be investing for the short term. You should be financially planning for your future, not what you need to spend tomorrow. The fact that the S&P has already risen so much in this year should tell you something already. It’s unsustainable. On average the stock market has only ever averaged 8-9% of annual growth historically. Even if the stock market did nothing for the rest of the year, 2013 would already have been considered a very good year in investing.
So what should you do when the markets go down? Check to make sure your financial plan is still being followed. Are you still allocating your money in the proper ratios of what a balanced portfolio should look like? As bond prices drop and the stock market rises, is your exposure to stocks too high now? Make sure that you keep your desired ratios of stocks, bonds, fixed income and real estate within your desired targets. Remember that a good diversified portfolio will protect your money from a volatile market in any one particular sector.
Take the opportunity to buy into a down market. If you have been researching investments to buy and you haven’t yet pulled the trigger on it, then the best time to buy is when no one else wants it. Think of it as a shirt on the sales rack. Many people have looked at it browsed it and no one wants it. It’s been sitting there so it eventually goes on clearance. When it’s on clearance it’s as low as it can get, but it’s a shirt that you’ve been scoping out every day, so now that it’s so cheap why not buy it?
Don’t let mass media influence your decisions because media is there to provide entertainment. No one would read the news if it was boring, but if the headlines were overly dramatic then it would catch your attention. Stay true to your principles and don’t let your emotions get the best of you. Remember that your goal is to build a well balanced, diversified portfolio that will help you weather the worst of times and reward you during the good times. If you need to top up a specific asset class because it is now running under your desired goals, then do so. This is how balancing a portfolio works and it is something you should be doing periodically when significant financial events occur.
Remember my last post about the CPP and how well it manages its money even in turbulent times? It seems that the Toronto Star has been reading my past post and even they too are telling you how you should be learning from them too. As I have mentioned before, stay patient, give yourself a longer time horizon and all of these turbulent times will feel like a road bump in your overall financial goals.