Written by Iain Butler (TMFOHCanada) at The Motley Fool Canada
It doesn’t take much scouring these days to find a lot of unhappiness and sadness out there.
Skyrocketing inflation that just won’t stop, Russia’s invasion of Ukraine, Bank of Canada interest rate hikes…the list goes on.
As a result, most major stock indexes in the US are down 10-20% and many investors’ portfolios are currently very red.
It’s times like these that investors may feel like throwing up their arms in frustration and simply saying, “To hell with it all.”
It’s time for me to put it on the line
I consider myself a bottom-up investor.
This involves ignoring much of the macro talk and market predictions that are scoffed at, and simply trying to find big companies that I believe offer a great opportunity to provide capital appreciation in the years ahead. coming.
I can’t predict when market declines like the one we are currently experiencing will occur, but I do know that declines like this are horrible no matter what we do to prepare for them.
As Mike Tyson once said (in one of the greatest quotes of all time), “everyone has a plan until they’re punched in the face.”
Not only does our net worth fall with the market, but the whole thing is magnified into far more of a disaster than it actually is by the media mobs and commentators who live for this kind of event.
Just thinking about it gives me chills (i.e. the media).
As for the 10 to 20% drop? Not really.
I know it’s awful, but I’m about to show you a photo and tell you a story that will get me – and hopefully you – through this time of chaos. For me, it’s kind of a happy place – kind of like the photo they told my wife to focus on in the hospital as she gave birth to our first daughter (although it happened turned out that an anesthetic mist was his happy place).
Fools, here’s a photo of the S&P/TSX Composite Index from January 1971. I realize there’s no label or title, but there’s a reason for it. I feared they would blur the picture.
There are two things to focus on:
Upward sloping trajectory of the chart.
The massive declines that happened, but then were erased just by removing them.
We preach long-term investing in Fool Canada’s flagship investment service, Securities adviser Canadaand this painting is the reason.
Very few experts accurately predict the big sales that are bound to happen, and even fewer (as in: nobody) accurately predict them all. Because these declines are relatively unexpected, they cause panic, fear, and often lead investors to make horrific decisions, such as liquidating at the point of maximum fear and locking in massive losses – potentially never to invest again.
But if you wait that these massive pullbacks will happen – because they always happen – it reduces (not eliminates) the chances of panic. And if you realize that the natural trajectory of the market is upward, a long-term mentality becomes the only strategy that effectively addresses these inevitable declines.
Illustrate with a story…
John and the index fund
Consider a fictional investor named John. John invested $10,000 in an S&P/TSX Composite Index fund on June 5, 1995 (assume he paid no fees, for simplicity).
John then quickly forgot that he had already made this purchase.
If John had been paying attention, he would have realized that five years after making his initial investment, his egg had more than doubled to $21,686.
He would surely have been tickled by this development. Instead, he had no idea.
On October 9, 2002 and a massive Nortel-fueled tech wreck later, John’s egg had cracked and was worth just $12,760. That’s a hair loss-inducing drop of nearly $10,000 in just over two years.
John’s stomach would surely have been in knots, at best. Instead, he had no idea.
Fast forward to June 5, 2008, 13 years after the original purchase. John’s investment had recovered well from the technological wreckage, simply because it does nothingand now stood at $33,568.
A happy dance would have been in order. Instead, he had no idea.
In less than a year, that $33,568 became $16,953 as the financial crisis treated Mr. Market like a piñata.
Rather than feeling beaten and bruised and maybe doing something reckless – you guessed it – he had no idea.
Although the road has been somewhat arduous, littered with all the bad things mentioned in the opening, and more, today John’s stake would once again be just over $37,000 – more than double those lows of the financial crisis.
By doing nothing – and I mean nothing – except invest in the vast Canadian market and by letting the underlying tow of the upward trajectory do its job over the long haul, John made a nice amount of money.
That, fools, is how to handle market downturns and why we’re so big on long-term investing and the ability it offers to generate handsome risk-adjusted returns.
It may seem counter-intuitive, but doing nothing is often the best course of action.
Invest in great companies and keep them forever
If you HAVE to tinker and want to prepare for the inevitable stock market crashes that are about to come, let me make a suggestion: make sure that every job you’re currently in is one you’d be happy to hold for 5 years.
Perhaps most importantly, make sure every shareholder is a safe company to survive the next 5 years no matter what is thrown at him.
In other words, populate your portfolio with businesses that are low financial risk, generate strong and consistent cash flow and boast an attractive competitive position.
My last suggestion? If the idea of finding quality companies and investing in them for the medium and long term interests you, why not consult Securities adviser Canada?
My team and I have been recommending Canadian and U.S. equities since 2013, and we’re beating the market by nearly 2x at the time.
We recommend two new actions each month with a detailed analysis, and I think you will find it to be excellent value for money.
to your wealth,
Iain Butler, CFA
Chief Investment Advisor, Motley Fool Canada
Post 1 Easy Action for Investors in a Falling Market appeared first on The Motley Fool Canada.
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