A paper tiger?
I’ve had a number of very similar emails this year from people who started investing recently after reading some articles on RetireJapan.
They basically all write something like: I opened an account, set it up, bought some investments, and now they are in the red and I am worried.
This is perfectly understandable. People invest because they want to have more money in the future. If they are going to lose money on their investments, they might as well not bother investing at all and spend it on a nice meal out with the family instead 🙂
However, there is another way to see this situation.
If you are investing in widely diversified low-cost index funds for the medium- to long-term and are still buying new investments every month, you should be hoping to see prices fall.
It’s like any other kind of shopping: as long as the products are okay, you would rather pay less for them. When you buy a stock (or a stock index) you are actually buying an ownership share in a company (or companies). The lower the price you pay for the company, the more value you receive.
Imagine two scenarios:
In the first, someone invests for decades and sees stock markets rise every year. Just before they retire there is a crash and the overheated markets correct.
In the second, someone invests for decades and sees stock market falls and stagnant prices. They buy cheap stocks every month for decades. Just before they retire the markets climb as investors realise what a bargain they are.
Clearly the second scenario is more attractive, so you shouldn’t be worried by stock market price falls as long as you are buying diversified low-cost indexes.
This very timely blog post explains why this tends to be true.
Of course we can’t time the markets so you need to make sure your asset allocation (mix of stocks, bonds, real estate, etc.) matches your situation. For example, you probably shouldn’t be heavily invested in stocks just before you plan to retire or need the money. This is why many people choose to increase the amount of bonds they have as they get closer to retirement.
But don’t worry too much about the numbers on the screen when you log into your investment account. Neither gains nor losses are real until you sell them (that’s why they’re called paper losses).
Personally I would love to see another big crash, followed by a few years of feeble markets. My retirement portfolio could do with a boost!
As for the “very timely blog post”, do you suppose the author should have included something about stock/share buybacks? These can increase earnings per share (and some other numbers), which (all things being equal) should result in higher share prices. Another way to effectively return value to shareholders.