There is an old saying, almost an axiom, in the brokerage business: “Buy low, sell high”. Of course that would be in a perfect world. As anyone who has ventured in and out of the market over the past few years is aware, this is anything but a perfect world.
I am not a licensed broker, but I do have a financial service business with my husband who does hold licenses, and I do deal with all clients as they call or come in to discuss what to do with their portfolios in good times and bad. (Remember: never ask a broker for advice! They will tell you anything in order to get you to buy a product or service on which they receive a commission. Always get financial advice from independent third parties who are licensed financial advisors. We aren’t going to try to sell you anything!)
One conversation that seems to be gaining in popularity, and upon which we actually did a webinar not long ago, was whether or not to continue to purchase stocks as the market plunges. There are all sorts of schools of thought out there, and many non-experts even have opinions. However, it stands to reason that when the market is having a nervous breakdown, you might want to back off until you can better predict what will happen next.
Keep in mind that historically, not everything that comes down must go back up. I speak from experience after having made some incorrect assumptions along those lines years ago. When Microsoft was being hit hard in the late 90s I was told to “buy, buy, buy”. And I did. I remember paying well over $100 a share for my original purchases, and I then added on with another few hundred shares at less than $50 each. Do I need to remind everyone that Microsoft never again saw the heights it had seen in the late 90s as it split almost every few months? Bad move on my part.
That alone proved to me that buying more when the market tanks doesn’t always make sense. All the original blue chip corporations have taken a beating over the past decade: GE, AT&T, IBM… they will probably never reach their previous levels of market grandeur.
There’s another school of thought out there for buying mutual funds. A mutual fund is a collection of similar stocks such as health, technology, foreign money, etc. Many brokers who deal with mutual funds tell their clients to buy when the market falls because you are buying “dollar cost averaging”. Instead of paying a set price per share, you can invest any amount and that amount is then divided into a specific number of shares.
For instance, you can buy XYZ Fund for $100. Perhaps each share costs $50. You bought two shares. If that fund goes down, and shares drop to $25, the same $100 will buy you FOUR shares. When the market goes up again, you have four shares that will each increase in price.
In cases where your portfolio comprises only mutual funds (which should be diversified between aggressive stocks and ones that are less volatile such as bonds), your decision to keep buying more shares in funds that have decreased, should be based on how the fund reacted historically over the past ten years or so. It should have a record of bouncing back, and an average return that is in line with your original fund prospectus.
Depending on how you purchase your funds (a broker, online, etc.), you can use their software to run your own analyses, or you can have your broker do this for you. Remember: you are only asking him to run the historical analysis! Don’t let him try to talk to you into buying anything because “the time is right” or anything like that. Just sit back, look at the numbers, and think. Don’t react.
Just remember that not everything that goes down is going to come back up. Not every stock that has taken a hit finds a way to recover. We are no longer investing for the long term with the assumption that the market will see ups and downs but will still deliver higher returns the longer we wait.
Many families have lost their entire life savings over the past few years. For them, there is no long term investment that would make sense. They did that…and it didn’t work.