Currently markets around the world are attempting to recover from some pretty dramatic losses and as always when there is a market correction, a seemingly endless array of “experts” pop up and share with us their great wisdom.
However rather than try and sort out which experts seem to have the best theory this time around I prefer to calmly review my stock positions as opposed to joining in with the crowd and selling. It might be painful to see the value of a portfolio drop sharply but it is even more painful to sell out of perfectly good companies and then in the years ahead, watch their stock prices recover and then post healthy gains.
Many people will tell you that you need to treat investing in the stock market as a long term investment strategy and I tend to agree with this approach. Of course there can be excellent short term profits made by day trading for example, but this type of short term trading can involve significant risks and so is best avoided in my view.
Of course you can also lose money being a long term investor if you buy and hold poor performing stocks and I would guess that many investors (both short and long term) were hit hard by the current market slump. (Especially those who received margin calls)
So in the midst of all this turmoil it is a good time to recall why you purchased the stocks in your portfolio in the first place and see if you are still comfortable with your decision. In my case I have generally taken a position in a company because I feel (and hope) that it will be able to do well in an area of the economy with long term growth prospects.
For example I like alternative energy companies and expect them to do well in the years ahead, as public pressure leads to more of our energy needs being satisfied by wind farms and solar power etc. During the last few months I have gone back and looked at the research for these companies and could see no reason why I should sell.
In other words, if I believe in the long term prospects of the company I hold shares in why would a market correction change my view? In fact when the market dips I tend to buy a few extra shares in companies I like, or in companies that I have been watching for some time and waiting for a buying opportunity. This has generally been a good strategy, but this year I must admit I have had my fingers burnt a few times although I might be smiling in 2010. (I hope)
Now I can appreciate that many people would think that I am unwise buying shares at the moment because the market may fall again, but even if the market falls back another 10-15% I am reasonably confident over the long term most of the shares I hold will recover their value, and that in 5 years time I will look back and wish I had purchased more. There is little doubt that some of the stocks I purchased in the last few months will cost me money, but as long as my gains are much greater than my losses then I have a sound investment strategy.
It might be a bumpy ride this for the next few months but this presents us all with a good time to review our portfolios and if funds allow, perhaps look at picking up some stocks we could not afford to grab at last years prices! Of course each person needs to do what is best for their own individual circumstances and I would suggest if you are feeling nervous then it may be time to seek some good professional financial advice.
Also let’s not forget that the long term average return from investing in stocks is around 10% and that over the last few years the returns have been well above average. So as bad as this year has been, we will probably find in a few years time that this correction has just clipped us back down to the long term average. As the old saying goes, there is no such thing as a free lunch.