The toughest part of investing is not managing your money but managing your emotions. It is not wise to act on emotions. Instead, understand how the economy and financial markets work and that they inevitably disappoint from time to time. Then you can ride out the occasional rough periods with relative calmness. But if you consider the stock market to be a huge casino it is natural to panic when markets fall. The stock market does act like a casino sometimes as individual stocks, whole sectors and even the entire market often moves up and down on small changes in sentiment or outlook.
On any given day only a tiny percentage of any company’s shareholders are actually selling their shares. Stock prices are completely unpredictable from day to day. It’s only over longer periods that the logic of share ownership emerges: share prices follow earnings!
You will not find a single company that increased its earnings quarter after quarter and year after year without the stock price following. Same for a company with consistently lower earnings whose stock continued to rise, even in a strong bull market.
When you understand this simple principle you know what to do with stocks that are down despite their positive outlooks and also what to do with stocks that are down because the prospects for the business have worsened. The only people who should panic in a stock market sell-off are those who do not understand the basics an these are the ones who should not be in the market anyway. These are people who want to make quick money to meet short-term goals or who are too fearful to ride out occasional downturns.
The investor with long term goals and willing to buy into dips instead of panic selling or at least hold and reinvest dividends during the rough period should continue doing so.
The real successful investors have done so, in every previous downturn over the last 200 years.
Sven Franssen