Share prices have been moving around a lot lately. For example, the US Nasdaq index is down 23% over the past year. That makes some investors nervous, and they hope for a stock market recovery.
Personally, though, I am not sitting around waiting for shares to start hitting all-time highs again. In fact, I think a delayed rally could actually help my long-term investment returns. Here’s why.
One of the misconceptions many shareholders have is that any stock market falls or rises actually matter for them. In many cases, they do not.
There are two reasons I think like that. The first is that, as the old saying goes, it is not a stock market but a market of stocks. In other words, what the market average is doing does not affect my portfolio. What matters is whether the shares I own are moving up or down.
Secondly, as Warren Buffett’s teacher Ben Graham explained, the stock exchange can be thought of like a person called Mr. Market. Every day, Mr. Market offers you the ability to buy or sell shares at a given price.
But you do not have to. Moving stock prices do not matter to me — unless I act on them. If the value of shares I own has fallen, that is just what is known as a paper loss.
I only actually lose money if I sell the shares for less than I bought them. Alternatively, I can hold them in the hope of future price recovery.
Using market volatility to build wealth
As a believer in long-term investing, I try to find companies I think have outstanding future profit prospects. Once I own shares in such firms, I am in no hurry to sell them.
So if the value of those shares goes down, it does not bother me. If the businesses are as good as I think, I believe that the value will hopefully be reflected in the share prices in the long term. Indeed, a short-term price fall simply gives me a buying opportunity to add more such shares to my portfolio. I have a watchlist of what I think are excellent companies but with shares that look pricy to me, such as Dechra Pharmaceuticals and Spirax-Sarco. If their prices fall far enough, I am ready to buy.
A period of market volatility also lets me buy some income shares with an attractive yield. If a stock market rally pushes the price of those stocks up, the yield I get when I buy them will be lower. Over the course of decades, that can lead to a significant difference in the income I expect to receive for the time that I own the shares.
No fast stock market recovery? No problem!
That is why it suits me fine if there is not a market rally any time soon. In fact, a lower stock market can help me improve my investment returns. Not only can I buy little parts of good companies for cheaper than before, but I can also get higher yields from income shares than if I bought them after a stock market recovery.
That reflects my long-term investing philosophy. With that approach, I am in no hurry for the stock market to start hitting highs again!