Transcript: The importance of staying invested in volatile times

Don’t flee the market in a panic, but rather embrace the turmoil as an investment opportunity–you’ll be better off in the long run.

Daniel Needham: Market volatility is one of the most reliable things that you can predict. You don’t know what prices are going to do next month, next year. The one thing we know is that prices are going to move around, and what we see is that prices often move around more than fundamentals, more than the underlying cash flows. And that means at times, you’ll have these volatile periods where market prices will fall a lot, where stocks’ share prices will fall, and maybe even residential property prices will fall. And often people get scared. People feel the pain of losses more than they enjoy the pleasure of gains. One of the most important things is that you don’t overreact and sell stocks when they’re down or sell shares when they’re down. That’s the worst thing that people can do. We think that what you want to be able to do is be prepared for the periods of market volatility by buying assets that you think are worth more than the price that you’re paying for them.

At times, that means being willing to hold more cash. We view market volatility as an investment opportunity. Warren Buffett always says that he likes his stocks the way he likes his socks: on sale. So, often market volatility means lower prices. It’s a funny thing that in the stock market or the share market, people actually want more of something when the price goes up, and they want less of something when the price goes down. We think that’s exactly the opposite of how you should think about it. So, generally when prices fall, it means you’re able to buy stocks or shares, fractional ownerships of companies, at better prices. We view it as a positive, not a negative. And so we prepare for the volatility by demanding good prices before we invest, and that allows us to have capital or cash available to take advantage of the market opportunity.

So, it’s really important during periods of market volatility that you don’t overreact, that you don’t sell out your investment at the bottom. That’s the worst thing that people can do. Our research shows that those that sell out at the bottom and then buy back in, say a year later when they feel more comfortable, do much worse than those that stay invested. So, we think the most important thing is to actually not do anything and to talk to your financial advisor or your financial planner and really stick to the plan. That’s what the plan’s there for. In the short term, markets are going to move around a lot, and it’s very important that you take a long-term approach to investing. Our view is that when we have periods of market volatility or where prices fall, it’s often a time where you should be adding more to your investments rather than taking them away.

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