When the stock market declines, investors often react by reducing their investment contributions or cashing out altogether, only to buy back in (restart or increase contributions to their investment) once the stock market has recovered. This behavior is like paying full price and putting it on your credit card.
you ever heard someone say, “I wish I could have bought Apple or Amazon or BP stock back when…!” A person who says this, may wish that they had, or are regretting they missed a chance to buy a given stock at an historically lower price that it is today. They wish they had the opportunity to buy the given investment at a lower price and to hold onto until it increases in value.
When the stock market drops, why do investors relinquish to fear and emotion and sell their investment or reduce contributions? This behavior is the opposite from what they say they want. I believe most investors have heard that they should “buy low and sell high.” When the stock market declines, the investor is forced to “buy low and sell high.” By not surrendering to emotion and fear but staying focused on the investment goal allows the investor to take advantage of declines in the stock.
Every contribution you make through your payroll deductions or monthly contributions to an investment, you are buying shares of that mutual fund. Mutual funds are simply groups of stocks put together by fund managers. Once you buy the shares, you own it until you sell it. As an investor, you want to own as many shares as possible. The price of that mutual fund share fluctuates daily.
- Investor 1 may feel defeated, because their account value is lower than what they contributed. Investing is long-term and remember, you want to accumulate as many shares as possible.
- Investor 2 substantially increased their contribution during the declining market, resulting in the purchase of more shares. They bought low. The increase in the price per share on 3/31 allowed the investor to have an account value greater than their contribution, even though the price per share has not fully recovered to its price on 2/14 of $14.72.
Markets fluctuate, going up and down over time. If you have time until you need the money in the account, I encourage you think of a down market as an opportunity to buy low and consider increasing your contributions to your retirement accounts. You may thank yourself in the future! As always, I am a phone call away.
Disclosures: Content in this material is for general information and is not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk, including loss of principal. Apple, Amazon and BP stocks referenced are to be used as an example; Classic Financial Services or LPL Financial is not recommending, advising or endorsing investment in these stocks.