I recently had this conversation with one of my good friend who is a financial planner manager and we were discussing how people react when the market goes down suddenly. What bulls do in a bear market? They see red and they run as hard as they can! This is basically what people do when they realized they just lost 10% in a span of a week. They want to sell everything and buy GIC’s! It’s funny how they easily forget that they actually signed saying they didn’t care much about market fluctuation as they know their investment horizon is very long.
So before calling your bank and telling them to sell everything, here is what you should do:
#1: Pull out your file and acknowledge how good the market has been for you over the past 5 years. Human beings have this tendency of living in the present and the future but they often forget to look behind them. If you have been averaging double digit return for the past 5 years (which is probably the case for many of you), it is simply normal to lose money after a while. Calculate what is your new rate of return once the market dropped and you will probably realize that you are still making more than you would have made with some GIC’s invested 5 years ago.
#2: Revise the plan you and your financial planner have design a while ago. Look at the investment profile you signed, at the goal of this specific portfolio and the investment horizon you had determined. Chances are that you bought funds that could (and did!) fluctuate over time because you don’t need this money right away and, therefore, your investment horizon has another 10 years left.
#3: Note where your portfolio is sitting when you have a moment of panic and then wait a week. If you don’t look at your portfolio for a week and then reopen your computer, chances are that you will have enough time to think clearly about your financial situation and determine what you really want to do. Nobody likes to lose money, I don’t! But when you are taking the time to think about it, there is nothing catastrophic about loosing 10% of your portfolio. It is part of the investing game! Could you imagine the face of the people who sold their TSX shares on Monday and they saw the same shares going back up in the span of 2 days? They must tell anyone that they lost money in the stock market and there is no money to be made there. Instead, they could have waited a week and smile saying that they were tough enough to ride the wave and it paid back.
The key point when you are trading is to be able to stay calm and take your time to think before making any moves.
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