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Staring at all the losses in your portfolio, you might well want to take some time off from investing right now. After all, you may think, having some extra money in the bank right now could save a lot of trouble if you get laid off or have a financial emergency. And given how your stocks look right now, why throw good money after bad?
Sure, that's a tempting concept. But it would be the biggest investing mistake you could possibly make right now.
If you bought high …
For years, no one had any trouble holding onto their investing discipline. With outstanding returns motivating you, you could continually add money to your portfolio with confidence that it would grow -- and all you had to do was look at your monthly statement to get instant feedback about how great a decision you had made.
In particular, the most recent bull market encouraged investors to make a number of smart moves in their portfolios. The stellar performance in emerging markets companies like Vale (NYSE: RIO ) , Infosys (Nasdaq: INFY ) , and Mechel OAO (NYSE: MTL ) got some investors to consider foreign stocks for the very first time. Booming real estate markets boosted prices of real estate investment trusts, and investors who bought REITs like Simon Property Group (NYSE: SPG ) and Public Storage (NYSE: PSA ) added a valuable tool to their fixed-income arsenal -- and enjoyed some great returns. And soaring energy costs turned some investors' attention to oil and gas royalty trusts like Precision Drilling (NYSE: PDS ) .
When 2007 came around, most of us stayed the course with few fears. We knew that the bull market had to end eventually, but we were convinced that any downturn would be short and only act as a new opportunity to buy at slightly cheaper prices. The subprime crisis, we felt sure, couldn't possibly have an impact on financially savvy investors like us.
Why not buy low?
Yet from a longer-term perspective, the huge drop in stocks over the past year hasn't turned your original investment plan into a big mistake. After all, when you decided to invest in stocks, you knew times like this would come. You didn't know when, and you didn't know just how bad they'd be -- but now that they're here, they shouldn't come as a big shock.
The biggest danger from the downturn isn't the loss you've seen in your net worth. Rather, it's the prospect that you might give up on investing entirely. Consider some of your choices:
- Sell everything and buy ultra-safe investments for the rest of your life. You'll never lose another penny, but will you be able to save enough to reach your goals? For most people, the answer is no.
- Hold onto what you have but don't buy another stock every again. Your portfolio will probably recover someday, but it could take a long time.
As an example, take a closer look at Amazon.com (Nasdaq: AMZN ) . As prospects for the Internet reached a high point in 1999, investors happily paid $70, $80, even $100 per share for the company. Then the bubble burst, and shares fell as low as $6 before hitting bottom.
If you bought high and sold at the bottom, you lost as much as 90% or more. If you held on, you eventually saw the company hit $100 again -- in October 2007. Yet unless you'd sold at exactly the right time, you'd have losses once again.
But consider your third choice:
- Use a regular investing plan that adds to your positions in promising stocks regardless of price.
If you had a plan with Amazon where you bought shares every year starting in 1999, you would've suffered big losses by 2002. But by picking up low-priced shares at the beginning of each year, you'd have lowered your average cost by now to just over $47 a share -- and you'd currently have a profit, despite the fact that shares are down almost 50% so far this year.
It's easy to decide you can't afford to invest when stocks are down. But in reality, when share prices are low, that's the time you can't afford not to invest. Don't let your fears derail your investment plan at its most critical time.
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