How to handle market volatility
When the dot com bubble popped in the early 2000s, a lot of investors dumped their Amazon stock.
The share price plunged 95% from its high. 🙁
Stock prices fluctuate a lot in the short term, but over the long run they ultimately reflect the intrinsic value of the underlying company. And that value is determined by how much money the business can produce.
In Amazon’s case, its revenue increased sharply year after year from 1998 to 2002 and beyond.
It was clear that Amazon had a legitimate business model and was expanding very quickly.
Amazon’s sales doubled, and then tripled in the early 2000s. But fear engulfed the stock market and AMZN’s price fell to just $6 per share in late 2001. A rational investor would have saw this as the opportunity of a lifetime! Eventually confidence in the company was restored and today AMZN is trading at $3,245 per share.
The lesson here is simple: Price is what you pay. Value is what you get. The market is not always rational. Don’t think of volatility as a bad thing. Use it to buy more of the investments that you believe will produce long term gains. Take advantage of market dips when high quality assets go on sale. 🙂
This week’s video about Bitcoin
The 50% drop in Bitcoin’s price over the last few weeks is a useful reminder of just how quickly markets can turn.
But short term volatility shouldn’t matter if investors just keep 2 things in mind.
- Develop a deep understanding of the investment, and how it fits in with your overall financial goals.
- Have patience.
I discuss both points in depth in my latest video about Bitcoin’s sudden correction here.
Understand what you’re investing in
A great way to increase one’s risk tolerance is to research and understand an investment before buying it.
Doing so will lower the investor’s anxiety and give him or her more confidence when making decisions. You chose the home you live in, the car you drive, the food you eat, and even your dentist. That’s because you know what’s best for yourself. Investing should be no different. If you don’t trust or understand something, don’t buy it.
When investments are losing value it’s tempting to sell to prevent any additional losses. But the consequence of doing that is you may miss out on long term future gains. That’s why it’s generally best to set it and forget it. As the saying goes, time in the market beats timing the market.
Random Useless Fact:
If you’re a top influencer you can bring your own cloud anywhere you go.