Learn to love market declines

Did today’s 2% fall in the Australian sharemarket give you a fright? Or are you jumping for joy?

The news from the Australian sharemarket was relentlessly negative today. Greek citizens queued in front of their banks as the threat of Grexit intensified. The Shanghai Composite Index fell again, taking losses on Chinese stocks to more than 20% in only a few weeks.

Some economists are now tipping that the iron ore price could fall to less than $40 a metric ton. And acquisitive law firm Slater & Gordon (ASX: SGH) saw its share price fall 25% as news broke that the Australian Securities and Investments Commission would launch an investigation into the company.

No wonder the All Ordinaries index fell 2%.

So how did you react? Well, nobody likes seeing their portfolio decline by thousands of dollars. But if you’re a long-term investor, as we try to encourage, market declines should be viewed as opportunities. In fact, you should train yourself to welcome them.

The reason is that you’re likely to be a net buyer of stocks over your lifetime. So you want prices in the bargain basement, not ascending the escalator to the top floor. Buying at higher prices says to the world: ‘I’m willing to accept lower returns – or maybe even the permanent loss of my capital’. And who wants to say that?

I’ve been investing for more than 20 years now, but I won’t pretend I’m superhuman. I get nervous and question myself too.

Feel the fear

But what I have done is train myself to ‘feel the fear and buy anyway’. It doesn’t always work out, of course, but I’ve found the best opportunities tend to come when you are really, really worried. For example, I bought Macquarie Group (ASX: MQG) shares the day after US investment bank Lehmann Brothers collapsed in 2008. It was a difficult time and banks around the world continued collapsing for another year.

Today’s 2% fall seems like nothing in comparison. Even so, I’ve been checking my watch list for stocks that are getting closer to recommendation upgrades. The further prices fall, the more Buy recommendations Intelligent Investor will issue.

Horror headlines might encourage you to click on headlines, but keep it in perspective. Today’s 2% fall will be all but forgotten next month.

Even if the news gets worse tomorrow, as it might well do, try to think about it differently. Bad news can be great news for your portfolio’s future returns.

Disclosure: The author, James Greenhalgh, owns shares in Macquarie Group.

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