By Warren Black
With the recent turmoil in the markets, it is easy to panic as we see the value of our shares, and superannuation funds, plummet.
A study of the lives of the world's richest men shows that they not only ride times such as these, but see opportunity. When markets have a significant rise, as they have in the last five years, it is inevitable that a correction takes place.
Warren Buffet, the world's richest man at the moment, sees market corrections as a "discount sale". He has become a billionaire with an average return of only just over 30% per annum. He avoids speculation like the plague.
Australian finance commentator, Paul Clitheroe shows that if you had invested in the share market from 1979 to 2006 and missed the 10 best days of the market in that period, your average annual return drops from 11.5% to 8.5%. If you had missed the best 40 days, your average annual return drops to 5.5%! More than half!
It is in these times that we realize much of the recent gains in the stock market were from speculation. People did not invest their money based on research and careful consideration. They guessed and hoped; greed and fear.
What can we do in these uncertain times to weather this economic storm? Here are some tips that can help you ride these times of uncertainty:
Do not sell or discard value-stocks. Hold onto them. If the fundamentals and earnings of the stock are sound, and nothing has changed from when you bought the stock in the first place, hold onto them.
Stay objective. He or she who masters their emotions will win the game. Stay calm. Do not panic. Stick to your investment plan unless there are objective logical reasons to change it. Emotional panic causes you to lose money.
Take a contrarian view. The greatest investors know that when the media is "hyping up" the stock market, this is the time to be on your guard, and looking to sell. J F Kennedy's grandfather said in 1929 that he knew it was time to sell his shares when the cab driver was giving him stock tips! Many stocks are excellent value at this time, and in Warren Buffet's words, it is a "discount sale".
Don't watch the market all day unless you are a trader. Although it is important to keep an eye on your investments, and ensure that they are still appropriate, get on with life and enjoy it. Following on from this point, although you need money to do what you want to do, there are more important things in life than money. Very few people at the end of their days wish they had more money. They wished they spent more time with their families, and did the things they wanted to do.
Get educated and be proactive. Educated investors will always do better than the "guess and hope" investor! The best way to overcome anxiety is study the markets, understand what is happening, and look at alternatives. Knowledge brings certainty, which brings stability and peace of mind.
Finally, watch for opportunities. At times like these, there are opportunities to build wealth. While the US and Australian stock markets are reeling, stocks in other countries are doing well.
Warren Black is a lawyer and financial consultant. He has just launched a new CD series on growing and protecting wealth in recession.
