One of the most common questions I receive from those perplexed by the workings of financial markets is something I once wrestled with myself early in my investing journey:
Why can’t asset (stock) prices just go up, stay up, and keep going up? Must they come down, sometimes causing a 20% drop in portfolio value?
A quick answer would be:
Have you ever heard of anything that went up and never came down (besides the prices of goods and services in Nigeria)?
The reality is that anything that goes up and never comes down is headed for an inevitable disaster—worse than a crash, a total disappearance.
Market Corrections: A Necessary Mechanism
If stock prices only went up and never corrected, imagine the implications.
A fresh civil servant earning N100,000 per month would never be able to invest in the markets. The more she saves to purchase a single share, the higher the price rises, making it perpetually unaffordable.
Without periodic dips, the gap between the rich and the poor would be even wider, as only the wealthy could afford to enter the markets.
A Priceless Lesson from Warren Buffett
Warren Buffett, the Oracle of Omaha, provided a humorous but insightful perspective on market fluctuations in his 1997 letter to Berkshire Hathaway shareholders. He wrote:
A short quiz: If you plan to eat hamburgers (or kilishi) throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?
Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong.
Even though they plan to be net buyers of stocks for years, they celebrate when prices rise and panic when they fall. This is irrational.
Investors should be happy when stock prices decline, just as they would welcome lower prices when buying groceries or fuel.
Cheaper stocks mean more shares for the same investment amount, ultimately increasing the value of long-term holdings.
How Market Fluctuations Benefit Investors
Market fluctuations are not a reason to fear investing; rather, they present golden opportunities. Here’s why:
- Buying at a Discount: When markets decline, high-quality stocks often trade at historic lows, allowing investors to accumulate valuable assets at bargain prices. During these periods, astute investors can capitalize on market fluctuations by strategically acquiring undervalued securities. By exercising patience and conducting thorough research, investors can identify lucrative opportunities amidst market downturns.
- Dollar-Cost Averaging: Market dips allow investors to buy more shares at lower prices, reducing the overall cost per share and improving long-term returns. This proactive approach ultimately positions investors to benefit from potential future growth and capitalize on discounted assets.
- Compounding Wealth: By consistently investing during downturns, an investor positions themselves to reap substantial gains when the market eventually recovers.
- Weeding Out Short-Term Speculators: Market declines shake out speculative traders, leaving the playing field to those with well-thought-out, long-term investment strategies.
Read Also:
2025 Dividends Time Table: List of Dividends Declared in 2025 in Nigeria
Own a Piece of the Next Big Start-Up for as Little as $350!
The Smart Investor’s Mindset
Instead of worrying about whether the market will crash, focus on your investment plan and strategy.
Market fluctuations are often driven by emotions, not fundamentals, and should not deter you from your wealth-building goals.
Every market downturn presents a fresh opportunity to strengthen your portfolio.
To navigate market fluctuations effectively, you must master the following five principles of investing:
The Five (5) Holy Grail of Investing
- Know exactly what to buy (Value): Focus on assets with strong fundamentals and long-term potential.
- Know when to buy what (Momentum): Identify optimal entry points by analysing market trends and valuations.
- Know how much of what to buy per time (Asset Allocation): Diversify your portfolio and allocate funds based on your risk tolerance and financial goals.
- Know when to sell (Profit Taking): Have a clear exit strategy to secure profits and avoid emotional decision-making.
- Know how much of what to sell per time (Rebalancing): Regularly adjust your portfolio to maintain the desired risk-return profile.
Conclusion
So, the next time you see a headline that screams,
“Investors lose as the market falls…,”
Edit it in your mind to: “Short-term speculators lose as the market falls—but long-term investors gain.”
Stay invested, stay strategic, and embrace market corrections as the golden opportunities they truly are.
May the markets be with you.
Leave a Reply