Answers to
Practical Questions
Buy Shoes (ETFs) on Sale
Here is a strange one. When people have been coveting that new pair of shoes and they finally go on sale at 20–50% off, they get excited and leap at the chance to buy them, but when stocks or ETFs drop 20–50%, people not only hesitate to buy more, sometimes they sell the ones they have!
Warren Buffett sums this illogical and contradictory behaviour up beautifully: “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during this period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be net sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers* should much prefer sinking prices.”
*(I.e., TheAnswerIs followers who plan on leaving their money invested for a minimum of 10 years).
Long-term investors need to reframe a fall in the stock market. They need to tell themselves that a drop in stock or ETF unit prices is like buying shoes on sale. Volatility should actually be considered a long-term investor’s friend, not a foe! As points four and five illustrate, buying additional ETFs (shoes) on sale will lead to ETFs that provide higher long-term returns and higher dividend yields.
Volatility is the price one pays for long-term performance.