Where will the Dow Jones Industrial Average be after the electoral dust settles? Will it be pushed thousands of points lower, or will a bullish reversal cause the index to skyrocket to 20,000? Either scenario is certainly possible, as are thousands of other possible results in between. However, the secret the best long-term investors know is that it doesn’t really matter.
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Either way, you’ll be a winnerFrom a long-term perspective, I really don’t care what the market does, and neither should you. I say this because no matter what happens, you’ll be a winner. Obviously, if your stocks shoot up by 25% this year, you’ll be happy because your investments will be significantly more valuable, and you’ll end the year closer to your ultimate investing goals.
On the other hand, while a market correction or crash may seem like a terrible thing as you watch your portfolio’s value drop, the reality is quite the opposite.
The behavior of my Foolish colleagues can tell you everything you need to know about handling a market correction. If you look around Fool.Com, you won’t see any articles with messages to the effect of “stocks are down 10%, time to panic.” Rather, you’ll find that many of our writers are searching for the best bargains so our readers can buy shares cheaply.
Successful long-term investors love when stocks drop. It’s the best time to buy quality companies at a discount. Warren Buffett has said investors should buy a stock because they want to own the business, not because they want the price to go up. So, no matter what the market does, focus on investing in quality businesses. If you do this, over time, your portfolio’s performance will take care of itself.
Not caring takes emotion out of the equationOver the past 30 years, the S&P 500 has produced average total returns of about 9% per year. This not only includes the current correction, but the financial crisis, dot-com bubble, and 1987 crash, which all occurred during this time period. The point is, it’s safe to say no matter what’s happening now, stocks still perform well over the long run.
However, the average investor has produced an average annual total return of less than 2% during the same time period. How can this be?
The problem is that investors are people, and people are emotional. When stocks fall sharply like they’ve done recently, many people panic and sell in fear of their stocks going down even more. And, when the market is going up and up, that’s when investors are most willing to throw their money in. In other words, we all know that the point of investing is to buy low and sell high, but emotion causes investors to do the exact opposite.
By ignoring what the market is doing, you can effectively take emotion out of the picture. Simply focus on buying good businesses, and not what the stock market is doing, as I mentioned earlier. Don’t panic when the market drops, and don’t get greedy when it soars.
“The market” and “your stocks” are different conceptsMany people are shocked to find out that Warren Buffett, the best investor of all time, tends to underperform the market during the best of times. So how has he produced such amazing investment results over the past 50 years?
The answer is simple. Buffett realizes that outperforming the market in the bad times is more important than doing better than everyone else when the market is doing great. Consider this example:.
During the financial crisis, the S&P 500 fell more than 56% from its 2007 peak. In order to simply get back to even after such a loss, the index needed to gain more than 129%. On the other hand, rock-solid dividend stock Johnson & Johnson only fell by 29.4% during the same time period. In the ensuing rebound, the stock only needed a 41.6% gain to recover its pre-crisis value. This is one of the reasons Johnson & Johnson has significantly outperformed the market over long time periods.
My overall point is that if you’ve done your homework and constructed a portfolio of quality companies that are well-positioned to perform well in any market environment, you shouldn’t care what the overall market is doing.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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