As many of my clients and readers already know, life as a money manager has been immensely stressful over the past few months. It isn’t that my clients have lost an amount of money beyond recovery, or that my business model has failed: it’s more a feeling of defeat not just as an investor in the market but as a passionate advocate of the free market system. However, I try to push my emotions aside and think beyond the next 30 days: money gets made during times like these. I can bring true value to my clients, friends, and family if I can get them to see the big picture. And at this point it seems this may be a very good opportunity to buy.
We could start justifying this advice from a historical standpoint, pointing out all the other precipitous drops in the major indexes and the amount of time which it took for us to recover. Think 9/11, the ’87 crash, even the Great Depression: while the memories are scary, the correct financial move in each case would be to deposit cash back into the market in the weeks and months following the big declines. Using this method will lower the average purchase cost for each security and increase your returns when the market recovers. It’s the sort of simple strategy which smart people often forget to implement.
In this recent drop, it has been particularly hard to pick an entry date for starting the process of averaging money back into the market. Stocks have dropped in value so far so fast that many people are tempted to sit on the sidelines for a couple of months and wait. The thought process is, even if one isn’t invested during the first couple weeks of a rebound, they are better off missing some upside than experiencing further declines. It’s the same theory which applies to gambling losses causing more emotional pain than gambling winning causing emotional joy. The only problem is, in a market like this, moves of 500+ points happen all the time. Sitting on the sidelines for a month could possibly mean a swing of several thousand points in the Dow Jones.
Today’s post was inspired by my friend Jeremy over at Generation X Finance. He blogs primarily to an audience in their 20’s, 30’s, and 40’s and insists that ‘friends don’t let friends bail out of the market.’ It’s our duty as financial professionals to help people make prudent moves. The idea of pulling money out of the market at the very bottom is not being prudent. It’s being emotional. Putting money into the market on days when stocks move down may be the more prudent move.
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Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.