It's official — last week was the worst opening week ever for the U.S. stock market. The Dow Jones Industrial Average dropped 1,079 points. The broader S&P 500 index shed 122 points, or nearly 6 percent. Hyperbolic headlines are fanning the flames of investor anxiety and stock aversion. Even famed investor George Soros is making parallels to 2008, when stocks plunged.
As for me, I'll be buying stocks, specifically stock index funds. Not because I'm a glutton for punishment, but this is far from my first rodeo and I've learned a thing or three.
First, nobody knows whether this is a tiny blip in stocks after a very boring 2015, with both stocks and bonds virtually flat for the year and lower-than-average volatility. Even in a boring year like that, the S&P lost over 229 points in five trading days in August. That's nearly twice the loss of last week. Time will tell if this is just another in a series of market blips like last August or the beginning of the next market plunge.
Second, though the capriciousness of the stock market makes it unpredictable, the same cannot be said about human nature. When it comes to money, people are very predictable. If stocks plunge, people will panic and sell. If they surge, people will get greedy and buy. Individual investors typically lag the market through poor timing.
Third, the common wisdom of Black Friday — that it's better to buy things on sale than at full price — is as true for stocks as it is for flat-screen televisions. Thus, it's better to buy stocks after they go on sale, as they do in the wake of a plunge, than after a surge.
I maintain a pretty conservative portfolio that provides me the intestinal fortitude — and cash available on the sidelines — to buy when the herd is selling. Buying stock index funds this week is a far easier proposition compared to late 2008 and early 2009, when stocks had a half-off sale. If stocks continue to slide, it will get progressively harder. (By the way, I'm 58 years old and have roughly 55 percent of my portfolio in fixed-income investments and cash, and 45 percent in the stock market.)
I tell people that if they can't handle a 50 percent plunge in stocks, they shouldn't be invested in the stock market in the first place. So if this little downturn is causing you to lose sleep, you may want to get out now and stay away from stocks for good. At least you'll be getting out at a market high that exceeded that of the 2007 pre-crash high.
But if you believe in global capitalism, then you should believe that owners of companies like Apple, ExxonMobil and Nestlé will be rewarded in the long run. Stay the course or, even better, rebalance like I do and buy more stocks after the stock market really plunges. Statistically speaking, in the long run, it has worked well.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
Also of Interest
- Lessons learned from the 2015 markets
- Want to drop pounds fast? Try these tactics
- Drive Safe. Drive Smart. Take our award-winning Smart Driver course today!
Join AARP Today — Receive access to exclusive information, benefits and discounts