DIY investing has exploded since the 2008 financial crisis, and for good reason. There hasn’t really been much to worry about.
Until a few weeks ago, we were in the biggest bull run in history. If you started investing within the last 10 years, you’ve faced next to no adversity save for a few minor corrections.
Last week, investors were faced with the biggest single day loss most have seen in their investing careers. In fact, the TSX posted its worst single day loss since the second world war.
You won’t find many stocks on the TSX that aren’t down by double digits. Brace for it everyone, You’ve just witnessed the fastest stock market crash in history.
The most alarming thing for me? Waking up to Canadian Natural Resources (CNQ), my main oil and gas holding, down more than 75%.
I haven’t looked at the dollar value of my portfolio since this all started a few weeks ago. This is intentional. I’m sure it’s shrunk by tens of thousands of dollars.
But what’s the point of looking? I’ve invested in strong companies. Fundamentally, nothing has changed.
This is an absolutely pivotal moment for self-directed investors
Of course every investor knows of the buy and hold mentality. The issue is the execution of that strategy when faced with turmoil. It’s been extremely easy for the vast majority of investors to be excited for the stock market to fall so they can “buy the dip” over the last 10 years.
That is of course until they face two weeks of red, followed by a Monday morning that leaves their portfolio in shambles.
For those who can’t stomach the volatility, the “buy and hold investor” they’ve built themselves up to be during this bull run quickly evaporates as they sell and run.
They start convincing themselves they’ll sell now, and buy back in when the dust settles.
They’ve ditched the tried and tested method of buying strong companies and holding them to attempting to time the market.
If you’ve already done this, or you’re debating doing it, take the time and read the next portion of this article. It could either teach you a very valuable lesson on the road to self-directed investing or save you a ton of money.
The best course of action is to simply remain calm
It seems easy to say right? But it’s true. If you cannot resist the temptation to dump your holdings during times like this, you’ll never make it as a self-directed investor.
This is the cold, hard truth.
You’ll never guess the top, and you’ll never guess when the markets have finally hit rock bottom. If you do, you’ve gotten lucky.
So what exactly are some things you can do right now?
Reduce your risk
For one, if you’re teetering on the edge of selling your holdings, take a few days to think about it. If you come back with the same mentality, it’s apparent you’re investing above your overall tolerance for risk.
If you’ve already dumped your holdings, this applies to you as well. It may be time to rethink the overall makeup of your portfolio.
Review your original investment thesis
There should be a reason why you purchased a stock. Whether it was a growing dividend, strong overall growth or excellent income. Why are we reviewing this in times like this?
Well, more than likely nothing has changed. So if your reason for purchasing the stock hasn’t changed, why would you be selling it?
Dollar Cost Average
This is an investment strategy we preach consistently here at Stocktrades. For one, it’s extremely easy to follow. Regardless of prices, you continue to invest. In times like this, all it will do is drive your overall cost per share down, and this will look very pretty when the market turns around.
However, don’t put the cart before the horse when Dollar Cost Averaging. This is a mistake a lot of investors make, and we like to call it “catching a falling knife.” Consistently review why you purchased a stock prior to purchasing again. If fundamentals are weakening, it may be time to put that money elsewhere.
Averaging into a new position
If you’ve made it past the first step of not selling your holdings and running for the hills, you’re probably looking to buy some potential bargains. There’s nothing worse than buying a stock, only to see the markets fall by double digits again.
Those who were purchasing stocks the past few weeks are realizing this today. That is why it’s absolutely crucial to average into a new position, especially during times of significant volatility. Buy half a position now, and half in a week or even a month. That’s completely up to you.
Ignore the news and social media
This is the first stock market crash in the social media era. Back in 2008, websites like Facebook and Twitter were in their infancy, and didn’t have even close to the global exposure they do now. I feel very strongly that these platforms delivering information (often inaccurate) plays a large part in accelerating this fall.
The best thing you can do right now is simply ignore click-bait media. They’re primary source of revenue is to get you reading their articles. And in order for that to happen, they have to be interesting, and often over-the-top.
Stay the course
This, above all else, is the most important thing you can do.
The market will recover. There has never been a time where it hasn’t. If you’re a new investor, this may be the first time you’ve ever faced any sort of difficulty, and it won’t be the last.
Those who kept their holdings during the financial crisis have watched the S and P 500 triple since the bottom. Those who panicked and sold their holdings lost.
If you want to be a self-directed investor, one who saves hundreds of thousands in fees over the life of their portfolio, you’ll need to get the idea that action is a necessity during times like this out of your head.
Review the businesses you’ve invested in, and trust them moving forward. If you are fortunate enough to have cash during times like this, it can be the perfect time to lower your overall cost of owning these businesses.
Stay wise. Stay invested.