What Do I Do During a Turbulent Stock Market?

“The best single thing you could have done on March 11th, 1942 when I bought my first stock, was just buy an index fund and never look at a headline and never think about stocks anymore – just like you would do if you bought a farm. You would just buy the farm, and let the tenant farmer run it for you. I pointed out that if you put $10,000 in an index fund that reinvested dividends, and I paused for a moment to let the audience try and guess how much it would amount to. It would come out to 51 million dollars now [2018]. The only thing you really had to believe in then was that America would win the war, and America would progress as it has ever since 1776.”

-Warren Buffett

Keeping this in mind, today, we are going to be discussing actions to take during a turbulent stock market. If you want the one sentence summary, the answer is to “dollar-cost-average” into low-cost, market-cap weighted index funds. If you don't understand this, please continue reading.

Chances are, if you invest significant sums of money into the stock market, you may be watching where the stock market is headed on a weekly or daily basis. As a result, you may see how much money you have gained or lost, in theory. When the market goes down 1%, you might see your net worth drop by several thousands or tens of thousands of dollars.

However, the important question you need to ask yourself is, “Do you plan to retire in the next 5 to 10 years?”

If this is not the case, there is no benefit to tracking the daily fluctuations of the stock market. Actually, when your net worth goes down because the stock market is plummeting, you should feel good about dollar-cost-averaging. This is because you are acquiring more stock units as the stock price dips.

Ultimately, this means that we are putting a fixed dollar amount, say $500 on a monthly basis, into our account at, say, Vanguard, and using that money to buy index funds like VTSAX when times are good or when times are bad.

Let’s go over an analogy. Let’s say you go to Macy’s and there’s a shirt that’s marked 90% off. The $50 shirt is now selling for $5. Is it a better deal to buy that shirt at $5 or $50? Obviously, it’s a better deal to buy that shirt at $5. Now, let’s say that shirt will be worth $500 in 30 years. If you have $50 in your pocket, you can buy 10 shirts instead of just one. So you are getting more shirts that will one day be worth $500.

More is better, no?

So doesn’t it make sense to buy more shirts and not sell shirts? Do you go into a panic that the shirt market is crashing and shirts are suddenly worthless? No. So why do we do this with stocks? When stocks are falling, people sell because they feel bad. When stocks go up, they buy stock and feel good. This is the exact opposite of what you want to do.

Buy things when they are in the discount aisle. Have emotional fluctuations when you're watching Hallmark movies. Do not do this when you are investing in the stock market. Furthermore, you don’t want your emotional well-being to be dictated by how the market is doing. This is why you should be unfazed when the market is going up. Similarly, you should also be unfazed when the market is going down.

How can you get all of the battle-tested, tried and true knowledge as quickly as possible? I wrote a book explaining exactly this; it's short; it's cheap, and it's written in plain English. You can find it here: https://amzn.to/32PLB3x. You may also want to consider subscribing to this blog by entering your email on the homepage next to the “Never Miss a Post” section and following the podcast “Nondelusional Investing” wherever you get your podcasts.

Is there anything you found useful or that I missed above? If so, please leave a comment in the comment box below.

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Disclaimer: The article above is an opinion and is for informational/educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. The author has taken care in writing this post but makes no expressed or implied warranty of any kind and assumes no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of this information.