Every investor in stocks should know, there will be days, months, even years where you lose money.  It is part of the deal, higher average return in exchange for larger uncertainty of that return.  We invest in stocks because generally over the long term they make more money than other available investments.  But there is another concept to keep in mind on those down days; usually what is really driving the price on a short term basis is speculation about where a stock price is going, not investing in the company’s long term prospects of making profits and growing the company.  Here’s an example.  Suppose you have a bunch of small stuffed animals that your child likes.  They have some intrinsic value–they entertain your little one for a few seconds.  Parents, treasuring those few moments a day are willing to fork over $10 for them.  Then something odd happens, for whatever reason there is a growing momentum among the population that these little stuffed toys are extremely valuable!  People start bidding them up on eBay and some sell for $1000’s.  (Note these reasons are extremely hard to predict, and you could argue its exactly what many financial professionals are trying to do).  Suddenly, you’re rich!  Junior’s toys are going to put him through college!  Then later, people start to realize, wait, these are just toys.  Their intrinsic value is simply their ability to entertain a child.  Granted, on the right day a parent might pay $1000’s, but usually that’s a $10 value.  Their value plummets right back down to what you paid for them, and you have lost $1000’s.  But have you really?  You never really had that money.  All that happened is you owned something that a bunch of people were willing to pay insane amounts to get, but in the end you never “made” or “lost” any money at all.  The intrinsic value of what you own (in the case of a stuffed animal, its ability to entertain or in the case of a stock, the company’s ability to generate profits) is exactly the same.  You haven’t “gained” or “lost” anything!

Speculation, like in the above case, drives short-term prices out of touch with the asset’s long-term value.  Keep this in mind on those days where a stock or fund you own drops by 5% or more in a day.  Is the value of this company really 5% less than it was yesterday?  Is it’s ability to generate profits now and into the future really 5% less?  Generally, no.  The company is largely the same, but speculators are reacting to some news to drive its stock price lower (note the same holds in reverse, the company usually doesn’t gain intrinsic value that much in a day either).  If it’s still a good company, it’s still worth owning.

Also remember there are only two times where the price of something matters, when you buy it and when you sell it.  Everything in between is noise.

Note, the example is true by the way, checkout the Beanie Baby craze of the 1990’s.