Should you be an Investor in Common Stocks?

Suppose you have saved over $100,000 in your investment account for several years. You have invested primarily in common stocks of good companies. A few banks and some REITS make up over 95% of your portfolio of 5 stocks. The remaining 5% is in cash.

On a Monday, everything is fine and looks great. On Tuesday, because of an incident in China, the market crashed. Before you know it, your $100,000 is showing a value of $76,500 in just one day. By Friday, your holdings are valued at just $53,000. You are 55 years old and need this money for your retirement. What would you do?

1. Sell Everything

2. Sit tight and do nothing.

3. Buy more stock.

If you Sell Everything, you aren’t an actual investor. You have been speculating and are focused on the price of the existing stock rising. You forget that any investment has ups and downs, but good companies increase value over time. Selling would lock in your mistake. Nothing has changed in the companies you own. You are continuing to receive your 7% dividend. Selling means you are a speculator and letting your natural human instinct kick in. Everyone is running for the exits, and you will join them. The market has decided to price down all stocks, and yours are caught up. You should not invest in publicly traded companies. All stocks go up and down without understanding that you are doomed, as are most, to buy high and sell low.

If you sit tight and do nothing, you are getting it right. Nothing has changed in your companies, so why are they worth less than they were just a few days ago? Mr. Market says so, I guess, but that is meaningless when it comes to the value of your holdings. Ignoring drastic market swings is a crucial skill to becoming a successful investor.

Buying more stock takes a solid will to ignore what your brain tells you. “Sell, sell, prices are dropping, and I will lose everything if I don’t sell.” Again, after checking the companies you own, if nothing has changed, I start buying. A bit every week or month, just adding to my holdings. I enjoy it when a dividend-paying stock drops because it means it’s on sale. I love buying things on sale. Don’t you? If you answered #1 on this little quiz, don’t despair. Investing in other securities allows you to create a comfortable income and investments without worries. I’ll discuss those in future newsletters. The other option is to work on your emotional response to significant stock market swings. Ultimately, that is the key to building your savings quickly.

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