Don’t close your 401(K)

So the UK voted to leave the EU, key political figures resigned, North Ireland and Scotland might want to leave the UK, and the stock market went into a free fall. What does it all mean? I don’t know, and nobody does. But don’t panic and close your 401(K) or move all the money into bonds.

I’ve seen this before.

Back in the 2007-2008 timeframe, when the housing bubble finally burst (I’d been expecting it for a couple of years), all of my coworkers started talking about moving their money out of stocks. I bought as much stock as I could, and it only took about three years for my money to double.

I don’t know if this is going to be a blip that lasts a week, or if the markets are going to tank and stay there a while. But you only lose your money if you sell while it’s low.

There are two theories about free markets.

One theory is that the market is as infallible as God Himself. The market never makes mistakes and the best always win. This was what I was raised to believe.

The opposite theory is that the markets aren’t God, but the exact opposite. The market is irrational human beings reacting to news, and computers trying to guess what humans are going to do next and profit from it. It’s no smarter than the average human, and perhaps it’s dumber.

Successful investors who subscribe to this second theory specialize in identifying companies that had fallen out of the market’s favor for no good reason. Sometimes companies fall out of favor for very good reasons, and they avoid those. But if a company is out of favor for no good reason, they buy while it’s down and make a fortune when the market comes to its senses. Then they repeat the cycle again. That’s the thinking behind the legendary book Margin of Safety.

Most of the time, that’s a lot of work. But back in 2007, the whole market was down–good companies and bad. Today it’s down again, and it’s probably going to stay down until everyone figures out what this stuff going on in Europe means. It’s probably going to take more than a week.

That means that for those willing to take the long view, it’s easy. Buy index funds that track the Wilshire 5000, essentially placing a bet on the entire stock market. Then you don’t have to worry about individual winners and losers. Buy what you can, keep paying your bills, and when the stock market starts hitting record highs again, think about selling it.

In times like this, you don’t have to be as smart as Warren Buffett. You just have to be smarter than the vast herds of dolts chasing get-rich-quick schemes.

It’s an opportunity. Opportunities like this usually only happen a once or twice each decade. So if you missed the last one, cash in on this one.

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