To The Moon

Someone once asked the Oracle of Omaha, Warren Buffett, why doesn’t everyone invest like you do and become rich? His answer was that few have the patience that he has. Most want instantaneous riches and that only happens with relatively few people. Good advice when the stock market falls-patience.

It does get painful. Day after day you watch the value of your stock market investments drop and take another chunk of profit out of your portfolio. What to do? According to the experts the number one rule is: patience and don’t panic!

Panic selling is a normal reaction when any investment takes a dramatic drop. However, that may not be the best action to take since the market is cyclical and will inevitably rebound. Panic sellers often miss out on the subsequent rebound; long-term patient investors usually win out in the long-run.

The best free advice is to have a plan in place stating exactly what you will do when the inevitable bear market strikes.

Part 1 of the plan is to assess your risk tolerance. How bad can it get before you can’t sleep at night. Each of us has a different tolerance for risk depending on a number of factors.

For example, if you are retired or close to retirement, your risk tolerance factor is quite a bit different than it was forty or fifty years earlier. If you are in this situation, you would consider stocks that have a stable price history, or bonds, or other fixed-income investments. This would allow you to hold on to value while sacrificing growth. A good outlook if you need money now or in a few years.

A young investor can be more concerned with long-term growth since after a sell-off there would be time to recoup losses. Losses to him would be temporary.

With a little internet searching you can discover websites that can help you determine your risk tolerance.

Part 2 of your plan would be to prepare for and limit losses. One simple strategy is to never buy a stock without placing a GTC (good-til-cancelled) stop loss at the same time. We all make mistakes, and this is one way to admit our mistake, cash out, and move on.

Diversification is also a good strategy. A stock mutual fund gives you instant diversification over many stocks and can cushion the blow when the market nosedives. Another twist is to invest in more than one mutual fund, each having a different portfolio and different objectives. You can even diversify over different market sectors by carefully choosing your funds.

Part 3 of your plan would be to focus on the long-term. While it’s guaranteed the market will fluctuate over the short term, stocks perform very well over the long term. There are very few assets that consistently outperform the stock market over many years. Try to view a market drop as a down blip in a long-term uptrend. If you have spare cash, look at the drop as a buying opportunity. Quality stocks may be available at bargain prices. If you have no spare cash, wait it out.

Also consider DCA, dollar-cost-averaging, as you invest. This simple technique, investing the same amount weekly or monthly, guarantees that you purchase your investment at an average price as the price swings up and down. As prices decrease you will be buying more stock (or mutual fund shares); as prices go up you will be buying fewer units. In the long run you may not get rich, but you won’t be an emotional basket case when prices fall.

As most successful investors will tell you, time in the market, and not timing the market, is the best strategy for long-term, patient investors.

While you may not be prepared for this down market, you can takes steps to prepare for the next one.

You need patience, not panic, to be a reach your goals.

$S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $DJIA(.DJI)$ $Cboe Volatility Index(VIX)$

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