When the Stock Market Tanks (You Know It Will)
If you're an old time exchange traded fund (ETF) investor, you've probably been witness to fairly significant declines in various sectors of the stock market. Typically, such declines trigger selling across the board which of course exacerbates the decline. What do you do under such situations?
I look for opportunities to buy. To keep emotions out of the equation, I simply look at which assets in my portfolio have taken the biggest hit. More often than not, the biggest declines indicate the most panic selling that has little to do with fundamentals. It also means that my asset allocations are probably off. So by buying more, I'm in effect rebalancing my portfolio.
Buying ETFs that look weak can be tough to do. It's much easier to chase ETFs that have performed well since it seems more intuitive to hope that past performance is a strong indicator of future performance. This is a flawed belief and often leads to poor market returns.
So what did I do with last week's broad-market declines? I bought more. In my case, the emerging market holdings I had were significantly below their highs and below my asset allocation percentages so I added some shares to my existing holdings. Another area that has been doing poorly lately are my bond ETF holdings. I'm going to have to look at acting on that too pretty soon.