Stock Market Panic

Yesterday (which was Monday, August 24, as I write this), the stock market tanked. It was down over 1,000 points in the early hours and manged to recover a bit to close "only" down 588 points. Headlines were, predictably, full of fear mongering: "A meltdown on Wall Street. Have you looked at your retirement fund today?"

Once again, the media, which needs something to write about every day, is trumpeting panic and instilling fear in people that their retirement has just been destroyed. Unless you just happened to retire and cash out all your stocks yesterday, it hasn't. As I mentioned before, you need to take a long term view of your investments. Stock market declines, even crashes, happen. You should expect it. Corrections are how the market re-adjusts when prices have gotten too high.

There were reports of people being unable to trade stocks using TD Ameritrade and Scottrade. This is actually probably for the best for them. Panic selling is never wise

If you are invested in mutual funds, panic selling is even worse. Mutual funds don't trade until the end of the day when the market has closed. So even if you had a crystal ball that told you in the morning that stocks were going to fall 1,000 points that day and you entered an order to sell your mutual fund in the morning, you wouldn't avoid the fall, because the fund won't be sold until the market has closed and by then, the damage has been done. Same thing with re-buying during a bounce or a rally. If the market is taking off in the morning and you put in a buy order for your mutual fund, it won't be settled until the end of the day. Even if the market closes up 1,000 points for the day, you've missed out on that gain because your order isn't filled until the close. Congratulations. You've just sold low and bought high. When trading mutual funds, dollar cost averaging by buying shares consistently over a period of time is the only way to go.

You can't time the market, people.

Thankfully, there were some saner heads in the media. I was pleased to see this article telling people not to panic and that corrections are normal. Kudos. I hope people read that article and take it to heart.

It pays to keep these three quotes from Warren Buffet in mind:

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.

During yesterday's decline, I felt zero concern for my portfolio because I followed that advice.