Recent stock market fluctuations are not a good guide to the future. Instead, use these tips to help you make better decisions

Some investors look at the most-recent stock market fluctuations and ask, could I have spotted them in advance, and capitalized on them?

We think the answer is no. Successful investors generally recognize that you can’t predict market swings, but you can profit instead from long-term growth in the economy, and from the wealth creation that takes place in well-established companies. However, investors become more receptive to the idea of predictions in the late stages of a market downturn, when alternative strategies may appear to have beaten a “buy and hold” approach.

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Letting recent stock market fluctuations dictate your buying and selling will almost always cost you money

Stock prices are volatile and share price fluctuations occur constantly. Stock market movements also have a large random element to them. It’s all too easy to read some predictive quality into them that really only exists in the investor’s mind. A rise that seems “too far and too fast” may lead into a slower but longer-lasting rise that goes on for years.

Here are common errors that can occur when investors follow share price fluctuations too closely.

• Becoming more “bullish” or optimistic because stock prices have gone up. Some investors only feel safe buying stocks after prices have risen. Yet this is the opposite of the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up.
• Becoming more “bearish” or pessimistic because stock prices have gone down. When other investors sell and drive prices down, you may wonder if they know something you don’t. But that doesn’t mean you should act hastily. Random influences may be at work. 

Recent stock market fluctuations do not necessarily mean you should sell

Share price fluctuations are nothing to lose sleep over, but they shouldn’t be completely ignored either. Investors should examine downturns in stocks they own and use every resource available to determine if action is needed. Note as well, that when it comes to more speculative holdings we think it does make sense to sell half of your holdings in a speculative stock if it experiences a huge surge in price and more than doubles. Speculative and aggressive holdings are more volatile and may experience huge share price fluctuations.

Use dollar cost averaging to protect against recent stock market fluctuations

By investing a fixed sum at regular intervals throughout their working years, perhaps increasing that sum from time to time as their income rises, investors can largely forget about market trends. That’s because they’ll automatically buy more shares when prices are low, and fewer when they are high, and they’ll benefit from the long-term rising trend in the market.

This investing technique is called dollar cost averaging. It’s a little like systematic saving, except that money is put into stocks (or mutual funds) instead of directly into a bank account.

Look towards long-term gains to avoid significant impact from recent stock market fluctuations  

One big risk of volatile markets is that they can spur you to make impulsive sell decisions. They lead some investors to sell “at the bottom”—that is, to sell some if not all their best holdings right around the time when the market hits what will turn out to be its low.

Successful investors protect themselves from impulsive sell decisions by maintaining a sense of perspective. They recognize that stock markets are volatile.

More importantly, they understand that the value of a stock is equal to the total of all dividends and other distributions it will ever pay out, plus the price you get when you sell it, discounted to the present by a discount rate that reflects the uncertainties involved.

In other words, the value of a stock depends on the total of all the money you will ever get from owning it. Why else would you buy it? However, you have to discount that total, because of the length of time you have to wait to get the money. The right discount rate will depend on the risk or uncertainty of receiving the payments, and on the general level of interest rates.

Use our three-part Successful Investor approach to safeguard your portfolio

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
3. Downplay or avoid stocks in the broker/media limelight. 

What stops you from selling during big stock market fluctuations?

In volatile markets, how do you determine if or when you should sell stocks?