I firmly believe if you are selling out of stocks right now you shouldn't be an investor. It's that simple. If you can't handle volatility, the stock market won't be gentle on your investment account.
There are a lot of other things to do in life, and with money, than get stressed out about the stock market. Go for a walk with your spouse, call a friend and get a cup of coffee, or just go work in the yard. Buy low risk securities only, like Treasuries, and don't worry about the ups and downs in stocks.
All of these activities can be enjoyed regardless of what the stock market is doing.
If you can enjoy these activities despite a volatile market, then you are in the right place. If your investment horizon is years and not months, you justify the decision to be in control of your own money. If you can use your head and buy stocks even when your heart is telling you to sell, you will be successful.
The market had a very poor third quarter. There's no denying that. In fact it was the 4th worst quarter for small caps on record with a decrease of 22 percent. But it will get better, and you should be buying some stocks right now if you are an investor.
I'm not saying go 'all in'. The market could fall further. But stay the course. Buy in tranches, and above all, don't lock in losses that you don't have to take.
If speculators, hedge funds, levered ETFs or any other short-term catalyst is driving your stocks lower despite solid fundamentals, reserve the right to think twice before selling. Indiscriminate selling is the opposite of using your head, and it's hard to step back into the market when you feel like you've been played.
Remember that a long-term strategy for success means buying stocks when they are cheap and selling when they are expensive, or when you have gains. I urge you to stick by this strategy - it works.
We can all think of at least two times in the last decade when buying stocks seemed like the wrong thing to do, but turned out to be the right call. I'm sure you remember how you felt during both periods.
In late 2001 I called my broker at Morgan Stanley and asked him to invest ten grand in high growth companies. I don't remember which companies, just that this was savings that wasn't needed for at least 5 years. My broker said it wasn't a good idea. He admired my patriotic attitude, but said it would be best to wait - that he'd call when it was time to start buying.
He never called, and the first best investment opportunity of my adult life vanished.
Fast forward to late 2008 and early 2009; nobody in their right mind was buying. Brokers were recommending clients hold - if they had any stocks left. Yet, it turned out to be the single best buying opportunity of the last two decades, better even than 2001.
Those that sold were crushed. Those that held are just fine right now. Those that bought in tranches through the crash, and on weakness during the subsequent recovery, have done very well, even doubling and tripling their money - sometimes in very safe investments.
They haven't had to try and pick tops and bottoms. Their methodical approach has yielded significant returns, with low stress levels. This is the group you want to be in.
Right now it's clearly not as bad as 2001, or 2008. Those were extreme periods that I hope we don't see again. But it is still a time when buying stocks feels like the wrong thing to do.
Despite this pervasive attitude, I think there is tremendous upside potential in stocks right now.
The simple fact is that nobody knows for sure which way the market will go at any particular time, even those who have been in the business forever. A person who tells you otherwise is one you should run from, and fast.
Buying stocks when everybody is selling has always proven to be successful, if your time horizon is years and not months. Right now the market is weak. Many stocks are down 20, 40, even 60 percent over the last quarter. It could get worse.
But if you are an investor you need to be buying some stock right now. It doesn't have to be a growth stock, a small cap stock, a gold stock or a technology stock - although I think there are many examples of each that are good buys. Depending on your risk tolerance you may prefer to buy stable dividend growers like McDonalds (NYSE: MCD) or Kimberly-Clark (NYSE: KMB). Those are wise investments.
That said, when stocks do recover it will be the smaller companies that will offer up the biggest gains. These will be in the double and triple digits, and it will be hard to not make money if you own shares of solid small companies. But you can't wait until the market gives the 'all clear' sign - because it will never come.
A long-term perspective means this volatile market is offering up opportunities, not removing them. It's counter-intuitive, but when good stocks fall they become less risky, not more risky.
The market could still drop further. If it does, I expect to buy more stocks, including both small caps and large cap dividend payers. Over the long-term, buying on extreme weakness is the only strategy that's guaranteed to work.
And history suggests that the fourth quarter will bring nice gains for small cap stocks. I'll go into more detail on this later in the week - the numbers are pretty convincing. This fall I'll be in a position to profit. I hope you will be too.
Disclosure: Author owns shares of MCD