March was an unsettling month. Just about anyone with assets outside a piggy bank had reason to pause and wonder: What do I do now?
Is now a good time to recalculate your investment strategy? For most investors, the answer is no. Individuals who took time – before the current difficulties began – to develop and adhere to a long-term strategy based on their goals, personal circumstances, and risk tolerance may be in a better position to ride out this volatility. The biggest obstacle to overcome now is the desire to do something hasty because it might feel better than doing nothing. For everyone else, developing a long-term strategy is still the best option.
Rich for a Reason
Warren Buffett, the richest man in the world, arrived at his coveted position through careful investment decisions. As of March 15, a share in Buffett's company, Berkshire Hathaway Inc., was trading for about $130,000, more than twice the $61,000 it was trading for in March 1998 (Berkshire Hathaway stock has never split, which helps explain its unusually high price).1
Buffett, 77, has seen it all. He became a Berkshire Hathaway director in 1965, and chairman and CEO in 1970.2 During this tenure, Buffett has guided his holding company through just about every conceivable type of economic crisis. His style can be summed up in a few words: Buy carefully and never sell. Although Buffett's investment style is not suitable for everyone, his observations about volatility are worth parsing.
- “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” 3
There's no doubt that a herd mentality is playing a role in the current situation. For example, much of this tempest owes to subprime mortgage– related problems. Although the vast majority of homeowners are not on the verge of defaulting on mortgages, Wall Street is afraid of what could happen, rather than what is actually going on. The spreading fear has caused liquidity – the supply of investable dollars – to dry up and make it rough on the markets because they depend on robust flows of money.
Investors who decide to sell because prices are falling are merely locking in their losses and eliminating their opportunities to participate in any market rebounds. Don't let widespread fear knock you off your moorings. Now is a good time to help ensure that your portfolio still conforms to your long-term strategy and to make only the necessary adjustments.
- “Investors should rejoice when markets fall.” 4
Some people might read this and think it's time for the “Oracle of Omaha” to retire. But think about your own spending habits. How do you make a major purchase such as a car? Once you have settled on the model, do you wait for the price to go up or down?
According to Buffett, when the markets are up, it's good news for sellers but not for investors who plan to buy and hold for several years. Buyers like down markets because prices are low.
This is not to say that it's time to start snapping up companies just because their stock prices have fallen. It's always critical to seek out quality opportunities through careful research to ensure that they are fundamentally strong and appropriate for your portfolio. But during market volatility, such opportunities may be more reasonably priced.
Rough economic times are to be expected and prepared for. If it's been a while since your last portfolio review, now is a good time to check your progress and look for potential opportunities presented by the current challenges.
1) Yahoo! Finance, 2008, for the period March 15, 1998, to March 15, 2008. Past performance is no guarantee of future results.
2) The Wall Street Journal Company Research, 2008
3) BrainyQuote, 2008
4) USA Today, March 30, 1999