If you are reading this note, everything’s fine. Its not the end of the world, contrary to what the financial media may be telling us. Yeah sure, markets are down, but hey, what’s new?
Corrections occur all the time. It’s just that we haven’t had one for a little while (like 9 months – which is a long time nowadays in the stock market), so most investors have forgotten what it feels like. Here’s a recap of historical declines from 1900 to 2015:
How do you deal with these situations? My colleague Josh Brown of Ritholtz Wealth Management recently published his tips, so I thought it would be appropriate to translate it for us Aussie investors. You can click here for Josh’s original article.
Here’s a trick that plays on human psychology to help us avoid making dumb mistakes, which we will no doubt regret later.
Firstly, gently remind yourself that this is exactly why people like me bang on about diversification. If however, you do not have a diversified portfolio to help absorb some of these shocks, please, don’t take any action now. It’s too late. There is nothing you can do now to absorb the shock.
There is however, one think you can do, even after the fact, that may very well mitigate poor judgement and regrettable action. Before reading on, please scroll to the bottom of this email, read my disclaimer, and scroll back up – thank you. If you did not do this, I’m essentially telling you this is NOT personal advice and I don’t even know whether these investments or strategy is right for you. This is simply an idea, a concept. Not advice.
Okay, so here we go. Log into your online trading account and click on your quoting screen. Check out the current prices for:
- Vanguard Australian Shares Index ETF
- Vanguard International Shares Index ETF
As of Tuesday, 28 June 2016, these ETF’s closed at $67.76 and $54.18 respectively
Now come up with an absurd price at which you would buy these investments. Say 15% lower? 20% lower? 25% lower? Let’s go with 20% lower. But hey, you can do whatever you want.
- Vanguard Australian Shares Index ETF – Closed at $67.76, now $54.21
- Vanguard International Shares Index ETF – Closed at $54.18, now $43.34
You get the idea.
These are prices 20% lower than what they have dropped already. Ridiculous you say? Indeed. This is the point of this exercise.
Next, go to your orders screen and place a ‘Good Till Cancelled’ buy order at these absurd prices. The order will not execute until these prices have been reached. Depending on the trading account you use, you may need to renew your order after a period of time.
The point of the exercise is to place the orders and leave them alone. Don’t adjust prices if the decline looks likes it on track, or markets begin to rise. You have a real portfolio for that, which is moving with the market.
Now that you have these absurd orders in place, something magical happens to your thought process. In fact, your mindset is completely re-arranged and you find yourself yearning for further declines. Does this make sense? No, of course not. Because you still have the rest of your portfolio that will decline in value along with it. But you’re so fixated on seeing these two investments’ prices hit, that it completely overpowers any concerns you have.
It’s like betting against your favorite footy team. Your heart wants them to win, but your mind wants the money should they lose. It’s exciting right? It even feels a little bit dirty. But getting into and changing your mindset completely distracts you from the panic that surrounds you.
Hey, imagine if the order hit. Now there’s a story to tell your mates. Not only could this be a brilliant trade, but it will serve as a reminder for the rest of your life that you’ve been through these corrections before and have come out the other end with a winner.