Oh my god: “A global correction” is underway!

Ramit Sethi · May 18th, 2006

The stock markets dropped a fair amount yesterday and now people are being a little sensationalistic for my tastes. Look at this image from last night:



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Get a life. All of a sudden, a global correction is underway, but I want to give you some perspective:

First, it’s a 1-day report. When things have gone bad in the past (this year, the last decade, and the last 50 years), they recovered. So if any of you or your parents are thinking of selling your stocks because of a 1-day report, please call me and let me politely educate you about what a stupid decision you have made. Based on a couple of conversations I’ve had this morning already, I might not be a good father when my kids make a mistake.

Anyway, let’s look to see what Warren Buffett says about situations like this week’s market drops. He points out that you should treat good stocks like toothpaste: If its value decreases and you still believe it’s going to be a good investment for the long term, it just went on sale. That’s a reason to be happy, not sad.

“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

“A market downturn, doesn’t bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity.”

Wow. Return to fundamentals? Buy low and hold for many years? Don’t chase the media-induced hype? Who would’ve thought.

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  1. But Ramit, I lost 10 dollars yesterday! Oh no, what will I do without those 10 dollars. You told me to invest so I could afford to by a home in a few years, and now I have 10 dollars less than I started with! What the hell were you thinking?!

    Oh, wait for a few days, or even weeks, and the market will recover. Blah Blah compound interested blah blah millions from a few thousand invested blah blah? Oh thats right, relax and buy more stock or mutual fund? Oh okay the world didn’t end. Thank god.

  2. I know more people who have gotten rich due to down markets than up markets.

  3. AAARGH! Everybody panic! It’s the attack of the giant ladyheads!

    … oh… wait… That’s not what this post is about? DOH!

  4. Tanner

    I have a question. I have $10,000 in my Vanguard right now that I will need to liquidate $6000 out of on June 22nd for a downpayment on a house. Should I leave the money in or take it out immediately?

  5. Tanner,

    I assume this is stocks?

    If somebody knew the answer to that question they’d be able to strike it rich. Unfortunately, nobody knows. And if they say they know they’re at best ignorant. At worst lying.

    So the best thing to do is not keep money that needs to be immediately available in stocks.

  6. Investor

    Long term investing is great. However it takes much intestinal fortitude to watch a portion of your portfolio drop $75000 in a day.

  7. Anonymous

    I’d rather invest in a market that gained 10% per year rather than a market that gained 0% per year for the first twenty years and then gained 10% per year after.

  8. Tanner

    Ok, thanks…after losing $1000 in 3-4 days, I took out my money just to be safe so I will have all of my downpayment money…thanks for the tip.

  9. Tanner,

    The person who answered before obviously doesn’t understand what vanguard does. I’m assuming that this is a Vanguard index fund, probably an S&P. There’s no reason not to leave the money in there until you need it. The market has averaged about 6% return per year over the last 30 years, bad times and good included. This little blip will certainly not make enough of a dent to take your $10,000 down to $6,000. There’s no advantage trying to speculate on the next month’s S&P return and with inflation where it is, you will lose value having extra money held as cash. Leave it in there and cash out when you need it.

  10. “Wow. Return to fundamentals? Buy low and hold for many years? Don’t chase the media-induced hype? Who would’ve thought.”

    Your all obviously forgetting one thing. Long term can mean many years. The average human life span is only 70-90 yrs. You may not live long enough to see any profit, or if you do you won’t have as much time to enjoy it.

  11. Independent George

    I wonder if this is the kind of rookie mistake that peope have to make before they learn? During my first year or so of investing, I was absolutely convinced that I could time the market. So, the $3,000 I dumped into my Roth IRA appreciated about 20% in the first 3 years… instead of the 60% I would have gotten had I just held on. Worse yet, I actually lost money on the second Roth I opened just a few months later.

    I’ve learned quite a bit since then. So it definitely sucks that I lost about $1,000 in the last 10 days. But I’m still slightly up on my initial investments, and don’t expect to spend it for another 30 years anyway.

    It was an expensive lesson for me to learn, but now it’s one I’ll never forget.

  12. “But I’m still slightly up on my initial investments, and don’t expect to spend it for another 30 years anyway.” -George

    Your Roth IRA can never go down in that time period?
    Plus, the main disadvantage of a Roth IRA (when compared to a traditional IRA) is that contributions are never tax-deductible.

  13. Roth IRA’s are better than Traditional in the sense that you can keep them in for however long you want, as opposed to 59.5.

    Rule of 72
    Take the return on your investment and put that into 72, your answer is the amount of time it takes your money to double.
    12% goes into 72 6 times… money doubles every six years APPROX.

  14. petrus M lenggu

    i want be free financial but i don’t know how to do it……i just have positive thinking in my brain an i’m sure one day i will get it and i want help to many people……

  15. “Your Roth IRA can never go down in that time period?” -Kai

    That’s not the point. He won’t need the money for 25+ years. Is there ANY historical evidence whatsoever that says that an investment WON’T grow over the course of 25+ years? Has there EVER been a 25-year period in which the value of the stock market was lower at the end than at the start?