When the Market "Feels" Risky

When the market gets choppy as it has been over the last few weeks, it's normal for investors to feel the urge to sell. The typical thinking is, "I better get out before this gets any worse." In many cases, those who sell may feel immediate relief having sold, despite the fact that they've created another problem without even realizing it - that they must figure out when to get back in.

Of course, they tell themselves that they'll get back in “when things settle down” as if they will miraculously feel more comfortable and opportunistic if the market falls further. Spoiler alert: There's almost no chance of this happening.

Those who ultimately sell often do so because they think that the risk of investing (or staying invested) is increasing as the market falls. But this isn't how it works.

For the diversified investor, when prices are falling as they are now, the risk of investing the next dollar is also falling. The same is true for dollars already invested. In other words, falling prices equals falling risk. This is intuitive, but not obvious which is one reason many investors get it wrong. (I know not you, I'm talking about the other investors.) Let me offer an example.

All things being equal, let's say you are given the choice to purchase your favorite profitable business for $1,000,000, or for $850,000. In which situation do you have more risk?

It's relatively obvious, no? The stock market works the same way. If we can now buy a basket of great companies for 15% off, isn't that inherently less risky than it was just four months ago when the market was 15% higher?

If it falls another 10% from here, the next dollar of investment will be less risky than the one we invest today. It may not feel like it, but that's the way it works.

There is another reason risk is falling and that's because there is more potential upside on the purchase. When we think with a clear mind, we realize that when we purchase shares during a down market, we are buying a portion of the future profits (which remain near all-time highs) generated by the great companies of America and the world for a lower price. That’s a better value and what we should be seeking as long-term investors.

This is great news for the accumulators and should make you that much more excited for these opportunities when prices become temporarily disconnected from their future value.

As for retirees, I realize that you may not be in a position to take advantage of downward market volatility aside from rebalancing, but this is why we've established a plan to account for your cash-flow needs while the market sorts itself out. We've bought ourselves time so that we don't have to make rash decisions in the face of uncertainty.

But regardless of your stage of life, the key to surviving, or even thriving through your investing lifetime is having the right perspective. Perhaps it's helpful to have a good thought to return to as the market whipsaws day by day. As a potential candidate, you might remind yourself that the next 20% market move doesn’t matter much…it’s the next 100% move that we don’t want to miss, and history has shown us which direction that is likely to be.