It's unfortunate to ignore the sentimental nature of markets. In the history of market there has always been either a discount or a premium over fair value. As if by coincidence, I'm reading the intelligent investor and a lot of what Graham said remains true to this date. There's almost always a premium/discount to the fair value of the stock market as a whole. The last few years have been extraordinarily good. Everyone knew a correction was coming. That's happening now. It's impossible to time the market but it's possible to differentiate between a correction to a fair value and a huge discount on price. In any case, the investor should be willing to wait for a while before the market realizes the value that they think the stock is worth.
Similar to how the last few years felt like everything was getting more and more expensive, the current downturn also seems like an over-correction (time will tell if I'm wrong). But what I'm sure is this - if the markets are down for a prolonged period - over 5 years - we have way bigger problems than the rate of return.
Here are the tips that I stick to:
- DO NOT try to time the market. Exception: when you strongly feel the market went into an over-correction or you feel the market is highly over-valued. (Graham uses a range between 25% - 75% for stocks vs bonds.)
- DO NOT invest money that you need in the short term in the market. Corollary: keep a buffer in cash/high-interest savings account + Treasury bonds for short term needs.
- DO NOT PANIC - it's really hard to resist the urge to buy when the markets are going up (FOMO) and the urge to sell when it's crashing. Of all the strategies, this one (buy high, sell low) is guaranteed to return a loss.
- For most passive investors, index funds + dollar cost averaging is the best way to go. These days robot managers do a good job of also expanding this into stocks + bonds + international coverage covering more scenarios - for example, a hedge against the US market or one's home market not doing well (enough) in the long run.
- Hold individual stocks only if you think you'll hold it even if there's no ticker for it with up-to-date price info.
I split my portfolio into 1) Cash/short term funds 2) Long term retirement fund and 3) Speculative investment. All the money on (3) is money I'm willing to lose (not that I want to lose). That's the only account where I buy riskier bets which are pretty much most individual shares. I keep completely separate accounts to make this assumption explicit and clear.