Tuesday, February 27, 2007

Ouch: Experiencing Volatility

So, like pretty much everyone else's (I started hearing "the stock market is crashing" conversations in the office hallways around 3:30), my investments took a pretty substantial hit today. My Roth went from about $7,190 this morning to exactly $6,970.90 as of this second. That is, as of right now, I've lost money in the stock market—only about $30, but nevertheless: there's less money in that account right now than I initially put into it. My 401(k) took less of a hit (in absolute terms—it actually lost about the same percentage, which hovers slightly above 3%), and is only about $2 below my contribution levels, but that freaks me out less because it's not all my money (that is, I put in something like $162; it's currently at $320, so I'm still winning, pretty much).

That's scary. That's an obvious thing to say, "it's scary to lose money," but it's also, you know, true. I totally knew, intellectually, that this happens, but it'd never actually happened yet (in my lengthy two months of being invested in stocks). It's not my favorite part of investing, so far.

So, what does one do with volatility? Obviously, you can't panic and liquidate your investment—that's dumb, and it makes permanent a loss that almost definitely wouldn't be if you left the money in there (penalties aside). Actually, I just placed an order with Vanguard to invest the final $1,000 to max out my 2007 contributions (that money had been sitting in my travel fund—I'll just start saving to there, instead of to the Roth, after I make my $1,000 Mini-E goal). Given that the price of Vanguard 2050 is currently lower than it was when I first bought it, I figure it's a pretty good deal. Nevertheless, that might be dumb, too—I think there's something about this visceral-experience-of-volatility thing that seems to demand action, demand not just change but change with a theory behind it, something that offers the illusion of control. That's pretty much what I gave in to, I guess, even though it might turn out to be a good move. This CNN Money article, "Survive a Market Drop—And Make it Work for You" could cut either way on my decision—it notes both that "people who pay close attention to news updates actually earn lower returns than people who seldom follow the news" (my guess would be because they tend to make impulsive decisions like this) and that "a down market can be a great time to buy solid investments at bargain prices."

Since after this, my Roth will be maxed out for 2007, I can't do this "it's low—buy!" thing again, and I'll just have to take the next ten months' worth of volatility with a long-term investor's world-weary shrug. And I can do that—because, like I said earlier, what other options are there? Sell? Not likely. But it is stressful, in a real way—that's my lesson for today, and I think it's a valuable one.


plonkee said...

Now I feel justified in not paying too much attention to the market news.

I inherited shares in a large bank in the late 80s which rose to £8 a share and then dropped to about £2.50 a share in the wake of the tech bubble bursting. That felt pretty bad and I hadn't even invested any cash in the first place.

JLP said...


Yeah, that's life. Welcome to the club. You'll REALLY notice drops once your 401(k) balance gets really big.

Don't worry, over the long-run you'll be in good shape