The Dow Jones industrial average dropped over 2000 points within a week in February 2018. A few of my friends panicked and asked, “Have you done anything to save your portfolio from this market crash?” I replied, “I did nothing to change my portfolio. In fact, I did not even realize the Dow Jones dropped over 2000 points.”
My answer immediately raised their curiosity level to find out what really makes me calm and settled during big market volatility. They were interested in hearing a more detailed answer from me. Obviously, they did not like my short answer. They wanted to know what strategy I use to support my short answer. Since they showed a willingness to listen, I did not have a problem spending 10 minutes to explain a basic common sense strategy. To avoid explaining my answer again next time when we have another market crash, I decided to document my detailed answer in this post so that I can easily share the link to anyone who asks me the same question when the Dow Jones or S&P 500 has a major drop in the future. Well, continue reading if you want to know the detailed answer that I gave them. You might learn something new!
A long-term investor does not panic during a market crash:
You should not be doing anything different during both a market decline and a market bubble. Investment in stocks is a pretty simple thing. It is about owning businesses or I would say being an investor in the U.S. total stock market index fund, which means owning a fair share of all public traded companies in the U.S. and let the capitalism do its work. Those companies would grow around 7% a year on average and pay around 1 to 2% dividend yields and that should over time make you a winner. Look at the Dow Jones industrial average historical chart below. The steady line has been always up even though there have been many downs in the chart.
Investment over time grows steady line and if you visualize the crazy market up and down around the steady line, the steady line is always upward. We are not smart enough to sell at the high and not smart enough to buy at the low so we will just stay the course and hang on through all that and most importantly if you are trying to accumulate money for retirement, what you want to do is to keep dumping cash into the U.S. total stock market index fund every month without timing the market at all. Trust me, when you reach age 60, you will have more money than you could imagine.
Time is your best gift:
To build wealth over time, think of the value of compounding. At 7% average return, money doubles every 10 years and it doubles again and it doubles again and by the time you are in retirement age, the money is multiplied 30 times over and maybe more. Start early and stick to your long-term plan. It is a mathematical fact. Unbelievable!
Speculation is the worst wealth generator:
Learn to be a long-term investor rather than a speculative investor. The whole focus of the market participation in our capitalistic system should not be shifted from an investment to a speculation. A speculation is a tragedy in which an investor is a looser and of course somebody is a winner and that is a Wall Street. They make billions of dollars a year in fees and commissions, which means investors lose that much to the market when they try to time the market.
The media and financial institutions are not in your best interest:
The media and the financial institutions are not attempting to advise you. They are trying to feed you with advertisements and convince you to do frequent trades and buy expensive mutual funds. It isn’t in their best interest for you to feel settled and calm and it isn’t in the Wall Street best interest either. Companies make a lot of money on trades when people try to time the market. Ignore the noise and go on about your day and stick to your long-term investment plan no matter how greedy or scared you become.