In the wake of the post-Christmas sale frenzy, I found myself wondering, “Why is it that people will beat each other senseless to save 75% on wrapping paper and cards, but they won’t take advantage of the biggest sale of all: A down stock market?”
Back when the market was tanking in 2008 and 2009, many people panicked and pulled all of their money out of the market. They chose to pay early withdraw penalties and taxes on their 401k’s and IRA’s rather than leave their money in what they saw as a losing proposition. But these are the same people who will drive out in two feet of snow on the day after Christmas to hit the sales in search of a bargain. They may have saved $2 on that roll of wrapping paper, but they missed out on the biggest sale of all when the market went down.
When the market hit bottom, I treated it like an after Christmas sale. I went shopping. I picked up a lot of great stocks and funds for a fraction of their real value. Thanks to the market panic, many companies that just a year earlier had been out of my reach were now comfortably affordable. Some examples: Google was under $300 per share at the time (it’s now over $600). Microsoft was under $15/share (it’s close to $30 now), Apple was under $90/share (it’s over $330 now), and Disney was $16/share (it’s now close to $40). In addition to buying individual stocks, I kept buying shares of the mutual funds that comprise my 401k and I increased contributions to my IRA’s.
Yes, for a time my overall portfolio went down (even though I was adding money to it like crazy) and it was depressing to watch. But I hung in there and kept racking up the bargains. As a result of all this sale shopping, my portfolio has not only fully recovered, it has gained an additional 20-25%, and the market still hasn’t hit the highs that it did before. To me, this was the sale of the century. In the long run, these cheaper shares will increase in value proportionally more than the more expensive shares I’m buying today. I think that beats saving 50% off a box of cards or getting a pair of holiday slippers for $5.
So why do people run from such a great opportunity? Part of it is that they don’t really understand how the market works and so they have a flawed perception. They see money going out of their portfolio and think of it as lost money so they rush to stop the flow of money out of the account. In one sense, it is a loss. But in another sense, it’s only a loss on paper. Sure your account went from $10,000 to $5,000. If you leave it alone, you’ll eventually get back to that $10k plus more as long as you aren’t invested in a bunch of stocks or funds that are just rotten. However, when you sell out you’ve made the loss real. You’ve truly lost $5,000. Sure, you got to keep your $5,000 (less taxes and penalties), but that other $5,000 is gone forever. People don’t look at a down market as a sale, they look at it as throwing good money after bad. If you shift your perception and think of it as a sale, you’ll fare much better in the long run.
True, there are some people who don’t need to be buying into the market, even during a sale. People who are close to retirement (or need their investment money for something soon) or who are already in retirement need security. Those people need to think about moving their assets into more stable products. But for younger people and those who don’t need the money right away, a down market is a great big sale. And you don’t have to go to the mall and get beat up in order to take advantage of it, either. Long after you’ve trashed that 50% off toy, you’ll have those stock shares you bought at 75% off waiting for you when you retire.