After months of continued runaway gains, the stock market seems like it may be entering a period of correction finally. In today’s pre-market for my tech heavy portfolio, I’m looking at a third day of ~5% losses across the board, and overall this is adding up to a significant impact to total portfolio value.
Now nobody, including me, knows where we will go from here. We might reenter bull territory on Monday, with the market buoyed up by Tesla’s overdue inclusion in the S&P 500 (despite that this should result in a very marginal decline for all other S&P member companies). Similarly Tesla might enter the S&P and fall hard anyway, taking the rest of the market with it on general sentiment of doom and gloom. The only thing I’m confident about is that the coming weeks and months won’t bring stagnation and a lack of volatility, particularly as the US election enters its final furlong in a month’s time.
So as a long term investor, how do I feel about this?
It likely sounds like nonsense, but honestly this is the part of the investment cycle that I look forward to the most. I am genuinely looking forward to seeing my portfolio decimated multiple times over. If we end-up 50% down from the peak, even better.
Why do I feel this way?
Because as a long term investor, I know I am invested in high quality well run businesses, with strong leadership, and a winning strategy. The market is short-sighted, and it will punish the excellent businesses I’m backing along with every other company, but in the long term I firmly expect the companies in my portfolio to outperform the market. And if the going gets tough, the conditions will be created for my well run businesses to get an even bigger leg-up on their more poorly managed competitors, and to accelerate penetration in each of their fields.
Albert and I have recently been encouraging a couple of friends to move some of their investable assets into single company stocks. A market downturn is understandably going to seem pretty disappointing to them, but actually just staying invested through a down market will in itself be of huge long term benefit in building their investment skillset and experience. It’s important to acknowledge the emotions in seeing a significant chunk of your net worth eroded, and it’s good to feel the fear – and to not to act rashly or hastily in response.
Personally, I’ve partially hedged myself against a down market by building a ~20% cash position that I have been waiting patiently to deploy back into the market at a better value point. If the market does literally get cut in half, my 20% cash becomes 40% cash, and in the long term my net portfolio value will take a material step-up.
But even if an investor doesn’t have new money on the sidelines, a downturn in the market is nothing to fear. The only situation in which a down market can wreak havoc on a portfolio, is if investments are sold while they are at a lower valuation. This is the key reason why you should “only invest money you do not need in the short term”, noting that the short term can be anything up to a couple of years.
Nobody knows where the market will be next week, next month, or next year. But we can all be confident that in ten years time, the market will be higher than it was at the peak a few days ago, and as a long term investor, really this is the only thing that counts.
