You’ve probably heard that you should BUY! BUY! BUY! (*NSYNC voice) your stocks right now since the market is down. On the surface, this doesn’t seem to make any sense. Investors are losing money, so why should you put your money into something that is decimating others’ fortunes? I’m here to give you the DL.
I am a believer in the Efficient Markets Hypothesis. This hypothesis says that the market price of a stock reflects all of the available information about that stock. Basically, the market price is a correct reflection of all of the available information on the company, and unless you have insider information, you won’t be able to beat the market.
Warren Buffet is an example that this assumption is not always correct. You can find stocks that are undervalued and buy them at a low price. Later when the price goes up to reflect to true value of the company, you will make money and beat the market. So while it is possible to beat the market without insider info, it is only possible if you dedicate all of the time that Warren Buffet has to finding undervalued stocks. And even most of the financial advisors and fund managers who dedicate this amount of time, produce an average annual return on their hand selected funds that is equal to, or less than the average market return over the long term. If trained professionals rarely beat the market, and Warren Buffet is either the only billionaire investor you know by name or one of a few, my guess is that you will probably not be successful using this investing strategy.
So then the question becomes, how can you maximize your returns if you can’t beat the market? I have good news. The market, on average, goes up over the long term. There will be short-term peaks and valleys, and when stocks start to dip, investors’ instincts are to sell before they lose more money. But if you’re playing the long game, which I suggest you do, this makes little sense.
I’m 30, and I do a quarterly review of my financial situation. Each quarter since I’ve started doing this, my investments and net worth have gone up…until my April 2020 review. The coronavirus has caused me to lose money on my investments for the first time in my life. But unlike many others, I didn’t sell off any of my investments and I’m not worried about them.