Is there any silver lining to falling stock prices? There sure is. When you buy shares of stock or even a mutual fund, it's natural to start cheering the market on. After all, the old maxim says to buy low and sell high. It's not that simple, though.
Consider the words of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett in his 1997 letter to shareholders: "A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time, but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves."
Buffett continues, saying, "But, now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the 'hamburgers' they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
These words should ring true for anyone investing for the long haul -- especially those just starting out. If you've just plunked your first thousand dollars into the stock market and plan to keep adding to it over the next decades, you'll benefit from falling prices in the short term. And, by investing for more than 10 years, you smooth out the risk of owning common stocks.
This counterintuitive perspective is also important if you're someone who regularly invests in stocks. Since you're buying stock perhaps every few months, you'll be able to get more shares with each payment if the prices are falling. Remember: It's not timing the market that matters, but your time in the market.
You can learn a lot from Buffett's engaging and educational letters to shareholders. Read them online at the Berkshire Hathaway website.
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