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A few days ago while talking to a good friend, I told him how excited I was to see the markets falling, that this dip was just the buying opportunity I was looking for. But I also couldn't help but drown him with worries about the stocks currently in my portfolio and how they'd fare if there was a prolonged downturn. Long story short, my friend, who's nearing retirement, turns to me and says, "Feelings won't help you retire."
My friend may not spend hours a day researching stocks, but he's a sensible person who reminded me not to commit the cardinal sin of investing: allowing your emotions to get the best of you.
Think before you act
It's often easy to see markets plummeting and get an itchy trigger finger, but it has been historically proven that long-term investors will compound their gains at a faster rate than traders who try to time the market's peaks and troughs.
What does this mean for you? It means you should stick to your game plan and not allow short-term news stories to get in the way of your long-term retirement goals.
Just this week, I highlighted how trouble at Toyota Motors (NYSE: TM ) will reduce production by 95,000 cars, stemming from the tragic earthquake and subsequent nuclear crisis in Japan. Investors panicked and sent shares down more than 10% over two days.
The real question though is whether Toyota's long-term growth strategy has changed; it really hasn't. The company will endure possibly billions in lost revenue in the near term, but it has been putting pressure on the U.S. market shares of General Motors (NYSE: GM ) and Ford (NYSE: F ) for years. Based on figures from 2009, the U.S. imported 1.2 million vehicles from Japan. In the long run, it appears Toyota is going to be just fine.
The same goes for luxury goods providers Tiffany (NYSE: TIF ) and Coach (NYSE: COH ) . Both companies derive roughly one-fifth of their revenue from Japan, and both have seen their share prices get clobbered this week. Although luxury goods were a fickle market prior to this disaster, it's highly unlikely that the Japanese earthquake will have a long-term effect on either company's profit potential. More importantly, the earthquake will have zero effect on their brand names; and that's what luxury goods are really all about -- owning a brand name.
The lesson here is that the possibility of forces moving the market beyond our control is always there. If we simply stick to our game plan and don't allow ourselves to be caught up by our emotions, chances are we're going to see the markets a lot clearer and be able to make smarter investment decisions.
What was your strategy this week when world markets tanked? Share your thoughts in the comments section below. Also, consider making your retirement goal one step easier by tracking your personalized portfolio with My Watchlist.