Investors are breathing a sigh of relief as the S&P 500 (^GSPC 0.09%) has rebounded from a war-related drop to hit new highs. But is it too soon?
The ceasefire has been holding steady, and oil prices are on their way down. Confident investors have been piling into tech stocks again, and the Nasdaq-100 index has gone back to beating the S&P 500.
This is a consistent sign that growth investors are fueling a bull market, and as valuations go up, investors should pause and make sure they’re investing in great companies they believe in, and not just getting excited about hyped-up stocks.
The market could change course at any time, without prior warning. A hallmark of market crashes is that they don’t happen when you’re expecting them. You must be ready for them at all times.
Consider what Warren Buffett said last year in his last annual call as CEO of Berkshire Hathaway.
Image source: The Motley Fool.
Check your emotions at the door
In response to a question about market volatility and whether a 15% market drop had presented Buffett with buying opportunities, Buffett said, “If it makes a difference to you whether your stocks are down 15% or not, you need to get a somewhat different investment philosophy.” He went on to caution listeners to expect a dramatic, “hair-curling” drop sometime over the next 20 years.
“The more sophisticated the system gets,” he continued, “the more the surprises can be out of right field. That’s just — that’s part of the stock market. And that’s what makes it a good place to focus your efforts if you got the proper temperament for it, and a terrible place to get involved if you get frightened by markets that decline and get excited when stock markets go up.”
When there’s global uncertainty, like a war or rising oil prices, investors can panic, get out of the markets, and lose money. To be a successful investor, you need check your emotions at the door, as Buffett advises.
Consider that investors who sold stocks as the market began to drop in March may have lost money, turning paper losses into real losses. Whoever didn’t panic and held on has seen the tide turn just a few weeks later, with the S&P 500 up nearly 5% year to date.
Investors should take heed of what he says, though, as the markets rise, too. Don’t get overexcited to the point of irresponsibility. Keep your portfolio diversified, and make sure to hold onto those excellent anchor stocks that can protect your holdings when the next market drop comes around.
