Stock market volatility is back with a vengeance, putting investors on a roller coaster ride since hitting a record high on January 26. Rattled stockholders can do no better than look to seasoned billionaire investors Ray Dalio and Warren Buffett for advice. Both insist that panicked selling is the wrong response to a market decline. Speaking at Harvard University's Institute of Politics in February, Dalio told attendees, as quoted by CNBC: "You cannot possibly succeed that way. You've got to do the opposite. It's when you're not scared you probably want to sell, and when you are scared, you probably want to buy."
The S&P 500 Index (SPX) rose 1.7% on Tuesday, and is up by 2.0% for the week. However, it's still down by 7.5% from the all-time record peak on January 26. Among the 50 trading sessions since then, 25 have been up and 25 have been down.
Dalio founded investment management firm Bridgewater Associates in 1975. Time magazine named him one of the 100 most influential people in the world, and Fortune magazine called Bridgewater the fifth most important private firm in the U.S., per the Institute of Politics at Harvard. According to Bloomberg, Dalio is worth about $14.6 billion
Buffett is the longtime chair and largest shareholder of Berkshire Hathaway Inc. (BRK.A), a holding company with a diverse set of operating divisions in addition to a large investment portfolio. Buffett is worth $83.7 billion, per Bloomberg's calculations.
4 Factors Ray Dalio Uses to Construct his All-Weather Portfolio
'Own Good Companies for Long Periods'
Warren Buffett holds similar opinions to Dalio, and his advice has been timelessly simple and consistent over the years. Per the same CNBC story, he told the channel in 2016 that "The money is made in investments by investing and by owning good companies for long periods of time," which he defined as "10, 20, 30 years from now."
To illustrate the point, investors who bought shares of Berkshire Hathaway in 1964 and held on through thick and thin would have seen each dollar increase to nearly $16,000 today. In the intervening years, Buffett cites four periods when Berkshire's stock dropped dramatically, by 59%, 37%, 49%, and 51%. Panicked investors who bailed out at those times would have missed spectacular future gains. (For more, see also: Buffett Warns Investors To Avoid Borrowing Money To Buy Stocks.)
'Accept the Ups And Downs'
"My holding period for individual stocks is typically two to five years, sometimes more, sometimes less—and some positions I've been holding in clients' portfolios for over a decade," writes CNBC guest contributor Mitch Goldberg, president of investment firm ClientFirst Strategy. Like Buffett, he counsels investing "for the very long term," which means "You've accepted the ups and downs that come along with being a long-term investor." In developing your investment profile three elements are essential, he says: time horizon, risk tolerance and financial goals.
Goldberg continues: "But as a rule, the single-biggest mistake I see investors make is improper diversification. It's the biggest mistake because it's the cause of substantial, permanent portfolio losses." In particular, he finds fault with active trading that swaps one stock in a given industry sector for another, given that all stocks in a particular sector tend to be highly correlated.
'Don't Watch the Market Closely'
"Don't watch the market closely," is another pearl of wisdom from Buffett in his 2016 CNBC interview, consistent with his opinion that volatility is short-term noise that should be ignored by the long-term investor. John Bogle, founder of mutual fund colossus The Vanguard Group, agrees. Worth about $80 million, Bogle would have become a multi-billionaire if he had turned Vanguard into a public company. Instead, he felt that keeping it as a low-cost mutual company was in the best interests of its investors, per Personal Finance News. (For more, see also: Strategies to Volatility-Proof Your Portfolio.)
Indeed, this extended passage from Buffett's February 2018 annual letter to Berkshire shareholders, as quoted by CNBC, captures this theme especially well, though he wrote in the context of warning against buying stocks on margin: "There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."