There are times when the stock market appears very unkind to the average investor. It seems to want to go down, down and down some more. It teases us with a turn to the positive only to turn again and end up in the red for the day, the week, the month and even the year. What is the average investor to do about this gut wrenching period in the markets? That my friend, is what this months newsletter is all about.
There is a price we must pay to see inflation beating returns over time when investing in stock markets throughout the world. That price is the occasional drop in those same markets. That drop can feel like a plunge, making us feel like our money has fallen into a hole with no bottom. The patient investor knows this is the price that must be paid to see better returns ahead. The educated investor ignores short term hysteria.
Why does the market go down? Many times it has to do with reasons out of our control. Maybe it went up too much. Maybe a recession is coming soon. Maybe inflation is skyrocketing. Maybe the federal reserve is raising interest rates. Maybe politicians are causing mayhem from both sides of the aisle. It could be Putin! It could be many of those things all at one time! The question is, what should you do about it?
The answer is nothing if you have properly diversified your portfolio with stocks and bonds from all over the world, while keeping the costs as low as possible with those low fee index funds. The right move in this case is to "just stand there" as John Bogle would say. "Tinkering" with the portfolio almost always backfires and you end up regretting doing something when you should have done nothing.
There are pluses to the market going down! If you are in the contribution phase, you are now able to buy more shares at a discounted price. Yes, stocks went on sale! Sales are good, when you are buying. We tend to get excited when the clothing store has a 50% off sale, but when the stock market offers a similar sale, we run away! That is a mistake. The sale on stocks will provide us higher returns over time if we keep buying.
What can we do when we feel bad because the market is down? We can turn off the TV, tune out the internet, and go for a walk in nature with our favorite person or animal. That will serve you much better than constantly watching your portfolio or the news tell you how bad things are in the world. The negative news makes you feel worse; not better. Your emotional state will thank you for stepping away.
Have you heard the story of Rip Van Winkle? Rip went for a walk, took a drink of something "special" and then fell asleep; waking up 20 years later. You and I could learn something from Rip. We are wise to set up our portfolio properly with a mix of stock and bond index funds (heavy on the stocks for more growth) and then go away for 20 years. The Dow was at about 10,000 twenty years ago. Today, it is over $32,000!
Now I realize that you and I are probably not going to set our portfolio and then not check it for 20 years, but I am here to say, it wouldn't be a bad idea. Yes, our stock allocation would have probably grown beyond where you started, but a rebalance every 20 years back to the start position might work out just fine. The point is, markets can and will go down in any given time period. Over time, they tend to go up a lot!
What are some financial decisions you can make NOW to combat a falling market? Reduce your spending. Pay down debt and/or eliminate it if you prefer. Increase savings and invest those savings into cheaper stock and bond markets. Look in the mirror. That person can do plenty to improve the situation even with scary times. Take control of the situation or the situation will take control of you.
What are other ways we can combat an unkind market? We can watch less of the negative news. We can disregard family and friends who freak out over tanking markets. We can read about the history of markets and see how down markets are actually our friend. If needed, we get ourselves a therapist or a friend who is a good listener to talk things out. Get it off your chest and move on with life.
If the good friend or therapist isn't available, you might need a good fee only financial advisor who can help you through the tough times. They can "talk you down from the ledge" when you start freaking out and help you stay the course when you really want to move everything to cash (a really bad idea). If this is you or you know someone like this, reach out to benchfn.com or peelingbacklayers.com. They can help.
Let's wrap it up. Stock and bond markets go up and down. When they go up, we feel super smart. When they go down, we feel sick to our stomach. To be a great investor, it requires us to behave more like a robot than an emotional human being. Identify ways to manage your emotions. We want to buy the market and stay in the market. It really is that simple. Come back in 20 years. Magic will have appeared!
Ups and Downs over 20 years = The Magic of Compounding
