What makes stock sales any different?
The days leading up to Black Friday are marked by shoppers busily planning their attack, already sussing out which stores will offer them the best deals. Their goal is to hunt down the same products they know and love at drastically reduced prices. At the height of the frenzy, people line up for hours on end and even resort to going fisticuffs over that limited supply of whatever happens to be cheap. Scoring a deal can feel so good. For some, it’s the definition of success.
You see a similar situation with real estate. The well-financed eagerly wait in the wings hoping for a correction so they can pounce on a property in their desired neighbourhood for less than they’d be able to otherwise. No one disagrees that more attractive buying opportunities exist after a housing bubble bursts and prices drop by 10%, 20% or more.
Yet mysteriously, with the stock market the tables get turned. Buyers don’t embrace price declines as a time to seek out bargains; instead they get spooked and will even flee the market altogether.
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This is puzzling behaviour when you consider that with investing, the long-term rewards from taking advantage of temporary market dips can be substantial. Doing so can mean the difference between having just enough to survive on when you’re no longer working and also being able to splurge on those Black Friday sales.
With something as important as their life savings, you’d think people would be well-versed in the nuts and bolts of investing for their retirement. Unfortunately that’s not the reality. When investors don’t know the true value of what they own like they do that new television set, they’re also unaware of exactly how appealing reduced stock prices are and of the deals that can be staring them right in the face.
In fact, people devote more time to researching which car to buy or where to go for their next vacation than they do on their investment portfolio, which leads to all kinds of problems down the road including panic selling during market drops. It’s a prime reason why the average investor never seems to get ahead – they do themselves a major disservice by treating stock price fluctuations as risk rather than the chance to build long-term wealth by buying the same great businesses they know and love at better prices.
If you need further convincing of the most productive approach to take during market slumps, remember that stocks have outperformed both inflation and real estate by a long shot over the long term. In other words, you can make more money as an investor if you do it right than you can collecting shoes or houses. It simply requires you to buy when stock prices are low and sell when they’re high, and not the other way around. Long story short, it pays to talk to your financial advisor more than your real estate agent.
Canadian house price source: BMO Capital Markets, Canadian Housing Association. 12/31/1993 – 12/31/2015. In C$.
Index source: Bloomberg LP. S&P 500 Index 12/31/1993 to 12/31/2015. Total returns in C$.
Historical inflation rate source: http://www.inflation.eu/inflation-rates/canada/historic-inflation/cpi-inflation-canada.aspx.
As it’s always been, market volatility was also a “problem” for investors in 2009. Read how we addressed it then…and how you can apply the same tactics as we do to be a successful investor today.
Be unmoved by market moves
Addresses the question: If a business’s fundamentals haven’t changed, does the price other investors are willing to pay for it in the short term impact its long-term value? Answer: Of course not.
Assume even stars will be underdogs at times
Underperformance isn’t just normal but necessary for long-term outperformance.