If you want to invest in the stock market you have to go in with the correct mindset. You have to be committed for the long run and you have to be confident in your investments. If your investment drops 10-20% you cannot panic and sell. That is one of the biggest mistakes that beginner investors make. If the company is strong and you believe it will come back you should be buying up more shares at a discount! Also, if it is a dividend yielding stock then you will not only get a discounted share price, but also a higher dividend yield!
If you invest in the stock market, then over the course of your lifetime you are almost guaranteed to see one of your investments drop by 50%. That is a good bet. Many things contribute to this. In a bear market the good stocks get thrown out with the bad, investors over sell a stock by over reacting to bad news, or the company itself is going through a rough patch. The key here is to not panic. In fact, during the market meltdown of 2008-2009, Warren Buffett began buying the S&P 500 well above its lows. He saw an opportunity to get in at a discount price, so he pulled the trigger. He knew that even though the market may drop more, he was getting in a price he felt confident about over the long run. He also made quite a bit of money off of investors who could not see out more than a couple of years ahead. He sold many long dated put options against the S&P 500 that don’t expire for many years to come, and he is already ahead on that trade. I believe he mentioned that the only thing he was worried about was the opportunity cost risk of selling the puts rather than doing something else. He then mentioned that he received $4.5 billion from selling the puts, and that the money would appreciate through investments until put expiration. This is a perfect example of not panicking and taking advantage of long term opportunity.
There is no reason an individual investor can’t take advantage of the same opportunities. Find a stock you like and buy it at a discounted price. Find dividend yielders you like and buy them at a discounted price. Better yet, sell puts to get in at a lower price AND collect a nice premium. One factor that determines the price of options is volatility, and volatility is typically elevated in a declining market so you get to collect fatter option premiums! Of course, you may get into a “discounted” stock only to see it fall another 10-20%. Do not let the short term pain blind the long term opportunity available in market declines. Especially if you are a 20 or 30 year old with a very long time horizon, do not panic. Find the good companies that get thrown out with the bad and get ready for them to rebound.
The stock market is one hell of a roller coaster ride at times. But for those who can make sound decisions in the face of ever increasing risk, there is a lot of money to be made from the mistakes of others. I have a friend who swears by treasury bonds. He doesn’t like the risk of putting money into stocks. I always tell him the opportunity cost of not being in stocks such as inflation eating away his purchasing power by parking money in treasury bonds. I always tell him that dividend yields alone give more than a treasury yield in many cases, and more often than not you can come out ahead with stock appreciation, option premiums, and dividend yield increases. Everyone is different though, and he is a happier person without having to worry about his portfolio. I suppose that is what is most important at the end of the day…being able to sleep worry free.
Money and Medicine for Millenials 