Posted by Tim Stobbs on October 17, 2014
I was recently out of town for work and I happen to look up at TV in the lobby the other day and saw the headline “Stock market Plunges” with a big red number and a negative sign in front of it. I typically don’ t follow the market day to day so I was sort of obvious to the fact this had been a several day event of dropping values. But in my head I translated the headline to “Stocks Now on Sale.”
I’m amused that the panic that seems to seep into people when a market takes a correction, they all consider it a bad event but I’m nearly jumping up and down at the thought of picking up some quality companies on discount. So when I got home my wife and I put together three trades in our accounts for about $13,000 and proceeded to become the proud owners of some Royal Bank shares, and Canadian Index ETFs. Ironically the market rebounded yesterday after we put in the trades so the Royal Bank shares alone were already up $154 in value.
I really do believe all the negative media coverage on these corrections tend to fog people’s head about “Oh, I’m losing money I should do something.” This of course results in panic selling and losing money. The issue is on an emotional side we fear losses more than we enjoy gains, so at the time this feels like a good idea to stop the loses. Yet we tend to ignore the somewhat obvious point of the stock market…you never lose or gain anything until we sell. At that point you lock in what you sell for and determine your gain or loss. Up until that point the stock market is nothing more than a overly excited neighbour trying to buy your kids swing set and offering you a new price every single day. So like any reasonable person you should relax and ignore your overly excited neighbour most of the time…that is until they offer a huge price where you can sell the old one and take the profit to buy a new one and still pocket some extra money.
Another issue people tend to forgot is when you get overly emotional you don’t think straight. Your logic is impaired and you really shouldn’t be making any big decisions at that point. So for my family we tend have a rough plan for our investing laid out in advance for the year. It isn’t hugely detailed, but just an idea of how much we want to save, to which accounts and what investments we are interested in getting (often just sectors rather that a specific company). That way when the market goes nuts, I tend to think about how can I use this to help the plan proceed rather than run around like Henny Penny thinking the sky is falling.
So how did you react to the market this week? Buy anything or just ignoring it all?