I lost $1,418.71 today. The stock market took a plunge, it’s biggest drop in six months. Since then, it’s been going up like crazy. I’ve sure loved the value that’s been added to my portfolio of mutual funds, but lately, it’s been tough for me to justify buying any more shares, knowing that the stock market is at an all time high.
Now, I don’t pretend to be an expert investor. I just started investing last fall, right before the presidential election. The market had been headed north for a few years at that point, in which I missed out on its gains. After making up my mind that I wasn’t going to be buying anything with my fairly large savings account, I decided to start investing. Being a follower of Mr. Money Mustache and Jim Collins of jlcollinsnh, I started to buy into the whole idea of index investing. I even read the book, A Random Walk Down Wall Street, to further my knowledge of this strategy. Whether or not index funds are the best way to go, I’m not here to give advice on. Some would say that picking individual stocks is a better idea. Others, like my friend Jason from DividendMantra.com, would argue that dividend growth investing is the best way to go. Hey, whatever floats your boat. I think those strategies are pretty rad. But, I am a believer in the strategy I’m taking, which is investing in index funds.
The path I’ve chosen is at the recommendation of Jim Collins of jlcollinsnh. He has a stock series on his blog that I have to admit, was the single biggest help I had in learning what to do with my growing savings account. Jim laid it all out there and set the expectation with me that the market goes up and down, sometimes in huge amounts. He says if you’re going to invest in stocks, you should invest for the long haul and STAY THE COURSE if you want to grow your wealth and not lose your rear end. So after reading his series and thinking hard about my risk tolerance, I took a look at myself, my spot in life and decided that I could handle it and stay the course if things got rough.
Things have been real cushy in the past 6 months that I’ve been investing. The market is up over 10% since I opened my Vanguard account and started shifting money over to it. I’ve seen an increase in the value of my assets of over $5,000 in that time frame. It’s been quite exciting. I’ve read that I should always use caution when trying to time the market, or in other words, trying to use price fluctuations to my advantage. Many argue that this can’t be done effectively by the majority of people, over the long term. I’m not sure what my stance is on this quite yet.
Here’s my strategy on it all. I like to follow Jim, as I believe he knows what he’s talking about, but I also like to follow Warren Buffet, who OBVIOUSLY knows his stuff. Here’s the quote that I do my investing by:
“Be fearful when others are greedy and greedy when others are fearful.”
And so, I’ve bought on the down days. I have not sold, because I am a long term investor, in it for the long haul. I plan to continue to build my portfolio out until the day that I’m financially independent. Even after that, I don’t ever plan to sell assets at a higher rate than they will be growing at. I plan to be a long term investor, never really decreasing my portfolio’s value over the long term.
Back to Warren’s quote. I think he’s dead on. As noted in the book “A Random Walk Down Wall Street” and in Jim Collins’ stock series, the market fluctuates like mad. However, it always goes up over the long term. Why does it fluctuate? Because people speculate like crazy. When the media tells the whole country that a “fiscal cliff” is approaching, people panic and sell their stock, because they think the market will tank. The same thing happens with a presidential election, where emotions go wild.
Right after the election, people freaked out. I believe they thought that Obama would wreck the economy with his spending plans. The market took a dip after his election. I bought stock. Then at the end of the year, the news scared the crap out of everyone with worries of a “fiscal cliff” approaching if congress didn’t come to a deal. Investors panicked and sold a bunch of shares, causing the market to drop. I bought more shares.
And today, with worries over China’s economy, the market took it’s biggest dip since last November. Shares of VTSAX, the stock I own, which is the Vanguard Total Stock Market Index fund, dropped $1.00 per share. I own 1,418 of them so I lost $1,418 today.
Some would say ouch, but what did I do? I bought another $5,000 worth of shares today. I’m in a great cash position and I believe that the market is being fearful right now, which means it’s my turn to be greedy.
Am I scared? No, because I have a bunch of additional capital sitting in the bank that I can buy more VTSAX shares with at a discount, if the market keeps dropping. I’m all about buying cheap stock, so bring it on stock market. Keep going down, I dare you.
It’s pretty great when you can lose $1,400 and not have to worry about it. That just means that you’re investing a ton of money and you’re that much closer to reaching financial independence. If you aren’t willing to take the hits of a drop in the stock market, you won’t be set up to ride the growth of it when it takes off.