Monday’s carnage should provide a wake-up call to investors.
Don’t sell your stocks. Buy more.
It’s days like this when you need to put into practice the things many of us have been preaching together in recent Seeking Alpha articles.
The idea that you keep a large cash cushion so you don’t have a worry about seeing your stock portfolio tank. With six to 12 months worth of expenses in the bank, you decrease the risk you’re going to panic sell to retreat to the relative safety of cash. You already enjoy the relative safety of cash. You invest – and ride out stock market storms – from a position of strength, not anxiety.
But you don’t merely ride out the storm. You take advantage of it. As I write this, my portfolio is down roughly 1.5 percent. Earlier in the session, it was off by a bit more than 2 percent. This isn’t catastrophic, but it’s more downside than I’m used to seeing in recent months, with the exception of mid March.
I’m not scared. Far from it. I’m trying to be patient. It only makes sense that we’ll see more downside. I’m anticipating it. With everything going on in the world – pandemic second waves in Europe and about to rear in the U.S. and Canada, an unprecedentedly contentious election just six weeks away – expect to see more pressure, if not prolonged downside or outright, even multiple sustained crashes. Profit taking plays a role as well. While I disagree, some people sell on valuation (though it’s interesting to see tech lead the late day partial rebound).
Here’s the thing – this all makes sense. I’d be more concerned if we weren’t seeing stocks drop from time to time. I’d be worried if I didn’t have the sense more is on the way.
So I have to resist buying too soon. That’s my problem. Starbucks (SBUX) at $76. AvalonBay Communities (AVB) and Essex Property Trust (ESS) both down more than 3 percent. Verizon (VZ) and AT&T (T) both just over 1 percent. It’s difficult to not buy these stocks and others with every bit of cash I have to put into the market.
My plan is to see how the week goes. If there’s more downside, I’ll start making incremental buys (which add to the incremental buying I do regularly regardless of market conditions). If there’s a rebound, I’ll wait for another day like Monday.
No matter when you think it’s time to buy. Or if you are unsettled by stocks dropping, ask the following question. If you made the right decisions on stocks when the market wasn’t tanking, you’ll like your answer and, hopefully, feel confident to starting buying low. Not so you can sell high, but so you can build position sizes in dividend-paying stocks that will eventually generate sizable income (on enhance your already sizable income stream) to help facilitate your road to traditional retirement or whatever the rest of us call it these days.
Does the Long-Term Story Remain Intact?
I didn’t buy SBUX, AVB, ESS, T, VZ, and others on some whim. I didn’t buy these stocks to get shaken out of them on a little bit of downside, particularly when it’s market driven and not company specific.
This is part of what boggles my mind about so many traditional investing mindsets. Stocks you own go down so you sell. This makes no sense. Did you buy them to begin with because you believe in the companies or because you just figured they’d go up? Nothing going on in the macro environment impacts the long-term stories of stocks I own. It might provide a temporary obstacle, but each company has a sound strategy to lead their space or maintain a best of breed balance sheet, if not both.
This is why I don’t speculate on stocks anymore. When there’s pressure I want to be able to look at my holdings and know I own good companies. Companies I can explain and quickly detail my bull case on. If I can’t do this, I probably shouldn’t own the stock.
As we have discussed in recent weeks, needing the money has nothing to do with the quality of the stocks you own. It has everything to do with your personal finance and investing strategies. If you don’t have enough cash flow and cash on hand to make yourself feel practically and psychologically safe, you shouldn’t be investing in the first place. All that will happen is you’ll get freaked out when your portfolio tanks, you’ll sell, take losses you would have been better off leaving on paper, and sour yourself on investing.
Who in their right mind would want to continue investing when you put $100 into stocks only to take out $75 over and over again? After you did it a few times, you feel shame. You’re effectively torturing yourself. So, like me a decade ago or so, you stay out of the market and hit a rut in other aspects of your financial life.
Once you get your personal finance ducks in a quack-free row, you’re good to go. You have the green light to invest in the stock market and not only stay invested, but take advantage of opportunities like we saw Monday and will, with as close to certainty as I can come, see for much of the rest of 2020.
The stock market isn’t falling apart. It’s giving us a gift. Accept it for as long as it’s available. If you do, you’ll be in a position of financial flexibility in ten years, if not considerably sooner. It’s times like these when we must focus and employ the theories and strategies we enjoy reading about and discussing on Seeking Alpha.
Disclosure: I am/we are long SBUX, AVB, ESS, T, VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.