At the time of writing the ASX All Ordinaries index is down 3% today. This adds to the 1.6% fall yesterday. Market downturns are scary.
When will it end? Should I sell now? These are normal questions to ask. Here are a few tips to ensure that you come out the other side as a winner.
First, simply don't look at your portfolio. Those big red numbers on the screen are purposefully designed to elicit emotions. They are unhelpful. Staying calm and rational in a downtown is important, and you don't need to provoke unnecessary emotions by checking your portfolio. Remember that the intrinsic value of great companies like CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC) and Flight Centre Travel Group Ltd (ASX: FLT) has not dropped 3% today. You don't need those big red numbers to tell you otherwise.
Second, keep a long term focus. A 5% or 10% dip in the share price of any of your holdings is normal and reasonably frequent.
As David Gardner says, "Stocks always go down faster than they go up, but they always go up more than they go down". Holding strong companies with great returns on equity like REA Group Limited (ASX: REA) and Carsales.com Ltd (ASX: CAR) through drawdowns is the best thing you can do for long term wealth.
Third, stay business-focussed. In the absence of earnings updates or changes to the fundamental strength of the business, it's most likely that its share price is simply being dragged down with the market. Regardless of whether the business was overvalued or undervalued before the downturn, almost all of them get dragged lower. If your holdings are great companies with no changes in outlook, continue to hold for many years as you would have done.
Lastly, if you can manage to stay long-term and business focussed, you might want to consider locking in some lower priced purchases. It might make your heart beat a little faster, but when things go on sale it's generally a good idea to buy.
Warren Buffett says "be fearful when others are greedy, and greedy when others are fearful". This goes double when great businesses go on sale. Timing the bottom is going to be difficult, so simply knowing what you are willing to pay for a great business is a big advantage.
Set up your trading account to automate the trade at that price, and you can remove some of your behavioural biases which work against you. Buying companies like Cochlear Limited (ASX: COH) for 3% less than it was yesterday probably isn't a bad idea.
Foolish takeaway
Don't succumb to emotions. Staying invested is in your best interest in the long run. Stay business focussed with a long term time horizon. And if you can do that, you might want to lock in some great companies at prices significantly lower than they were last week.
