Wednesday, June 8, 2011

Running for Cover Has Its Price

It's been a rough month or so in the market, and my portfolio has been no exception. In fact, I've been running downhill faster than the S&P. 
It's hard to watch these losses, but I've learned two things about these stretches over the past couple years.
  1. They are tough to take when you focus on how your portfolio is dwindling.
  2. They give investors great opportunities to add to their portfolios and make more money down the line.
One of the ongoing struggles for investors trying to make money in the stock market is fighting your own instincts.
Good investing is often counter-intuitive.
When the market dives and you feel the hurt, your gut tells you to start pulling money out. Then, it tells you to wait a while before stepping back in.
Intuition keeps us out of a lot of trouble, the same way it benefits animals who look for cover until a potential threat is safely out of sight.
But in investing, we should often be doing just the opposite. We should be using those market pullbacks to beef up our holdings at discount prices.
That takes conviction and discipline.
Unfortunately, few of us have enough of those qualities, and it eats away at our profits. Matt Koppenheffer has a nice take on the topic on the Motley Fool.
We seem to be wired to get excited about our investing when stock prices are chugging along a steady upward slope, even though history might tell us that's the time to be most cautious about investing our money.
I could have gotten shares of a number of different investments I own if I'd just been patient and waited for a pullback in price.
Nothing's worse than putting $1,000 of hard-earned cash into a couple stocks only to see them fall 10 percent in a few weeks after.
That's been the case for me with a few investments. Dolby Labs is down 12% since I bought. Berkshire Hathaway is down more than 10%.
That's been hard to watch.
But becoming gun-shy won't help make up for the losses. Becoming opportunistic will.
Take a look at this chart of the S&P 500's recovery since the March 2009 lows.
Since the market began its march out of the 2008 crash (the lowest point on the chart in March '09), we've endured at least three pullbacks larger than the one we're in.
Those were times when the market paused to catch up with itself, to set new prices on stocks -- generally a bit lower, but more accurate of the companies' true value.
I've heard these corrections called "healthy" by people much smarter than me. I trust those opinions are right.

I don't know how long this slump will last, or how low the dip will be.
But I know I want to have myself in a better position when prices start making their inevitable climb north again.
It's time to start shopping for what I want to buy when things are on sale.

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