It can be tough to know if you should buy, sell, or hold your investments when fears of a recession grow. You might even want to pull the covers up over your head and hide from the stock market’s twists and turns. But don’t despair when rumours start, and instead think about the following analogy before looking at your investment accounts next.
Lifehacker commenter “Daddy drinks because you cry” offered this advice recently for thinking about a stock market dip:
I love the “on sale” analogy. When I was a paid investment salesperson, I used the following example:
You spend $10 a week to buy 10 playing cards (you really like playing cards) because you believe they will increase in value. (Current value: 1 playing card = $1)
The market for playing cards goes down. Way down. Playing cards are now worth 50 cents. You have two choices – sell your playing cards (at a loss of 50 per cent), or treat it like a sale and buy 2 cards for the price of 1.
You weren’t planning on selling your playing cards for 20+ years anyway, and the way the playing card market has historically moved upwards OVER THE LONG TERM, you are likely to be positioned some day that cards are worth $2 each. Would you rather have sold your cards at a 50 per cent loss, or had double the amount of cards for the same initial cost?
Essentially, this is a more accessible way of thinking about the classic advice to “buy the tip” (i.e. pick up investments on the cheap) during a downturn. While it may not bring you the greatest comfort in a bear market, you can use this playing cards analogy to remember that eventually, those prices will go up and you’ll be glad you stocked up when you could. Whether you choose to buy more stocks or hold your current allocation mix, you’ll have time on your side.
Commenter “youngheart80″ chimed in on how this long-term thinking helps you consider the health of your retirement savings even when the market isn’t hot:
I love a down market because my buying power increases now, while I’m gainfully employed and with years to go before retirement, so that when it jumps again in however many years, I’ve socked away a lot of bargain stocks that get to boom.
When the market isn’t looking great, focus on building your emergency fund and paying down debt to be more flexible if an extended downturn occurs. If you have time before you retire, it’s unnecessary to take your investment portfolio too widely off course.