World markets plunged yesterday. Just to recap:
- Britain’s benchmark FTSE-100: -5.5%
- France’s CAC-40 Index: -6.8%
- Germany’s blue-chip DAX 30: -7.2%
- India’s benchmark stock index: -7.4%
- Hong Kong’s Hang Seng index: -5.5%
- Canada’s S&P/TSX composite index: -4.8%
- Brazilian stocks: -6.6%
- Argentina’s Merval index: -6.3%
About the only market not to decline was the U.S. markets, because they were closed for the holiday. Tomorrow, the U.S. markets are sure to follow suit. The real question is this: what should investors do?
A. Sell: Convinced that the falling dollar, rising inflation, credit market crisis, and the growing account deficit will surely plunge us into a recession and tank the stock market, we should sell. If you follow Rich Dad’s advice, plow all your assets into gold. Reality: If you are a long-term investor (10 years or more before you need your investments) does this week’s or this month’s or this year’s returns really matter?
B. Buy: A falling market always encourages many to sagely conclude that a “buying opportunity” has arisen. With this advice, some investors feel as if they’ve risen above the fray of the market’s ups and downs. It makes some believe they are in control, as if such swings matter only to the inexperienced investor. We might even quote Buffett when he talks about being greedy when others are fearful. Reality: We have no idea if this is a good time to buy. The market is down, but trust me, it can go down a lot more.
C. Watch American Idol with the family: This is my choice. True, the show after a number of years has grown rather predictable. It wasn’t really all that good to begin with. But for some reason I still find it entertaining. Reality: I predict we’ll hear a lot of contestants who sound rather “pitchy.” Paula may very well cry, and Simon will scowl. But I won’t do anything stupid with my investments.
A falling market certainly isn’t any fun. And we may be in for more declines. If it helps, don’t look at your investment balances each day. As long as you have an appropriate asset allocation plan in place, in the long run, I believe the investments will do just fine. That said, what do you do when the market is falling: buy, sell or nothing?
Published or updated February 14, 2013.