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Haha, I kid I kid – I’ll expand a bit. But seriously that is the TL;DR version. Look at me, being up-front with the TL;DR…
Recap of What’s Happened
If you’ve not turned on the news lately, you still probably have heard. My Facebook and Twitter were blowing up early this week with people freaking out, wondering if they should sell their stocks.
Everyone is abuzz about “the market” dropping a significant amount in the past week or so. News stations will point to the Dow Jones Industrial Average being down about 8.5% (now closer to 6.4%)% since January 26th.
This is true, but it’s definitely blown out of proportion by the media.
For starters, the Dow Jones is just an index of 30 companies. This means a few heavy hitters are driving this change. Compare that to the S&P500 (which is, as its name implies 500 companies) which is down just shy of 8% over the same time period.
Still down a similar amount, but smoothed out a bit.
To put things into perspective, the market is back to roughly where it was back in early December. As in, two months ago. We’ve not (yet) lost all the progress that was made since the Great Recession. We’ve barely made a dent in it.
A minor correction, but something that should be expected.
After all, gaining nearly 7% in a single month (which happened in January) isn’t exactly normal and shouldn’t be the expectation.
Until January 26th, we hadn’t experienced a daily loss of even 0.1% in 2018. That’s not normal.
The market goes up and down – this is what happens. It’s called volatility, and why the stock market is a bad place if you want to preserve your capital over relatively short periods of time.
If your time horizon is short – say five years or less, give or take – the stock market probably isn’t your best bet. Something with much less volatility, or even no volatility but a low rate of return, like a CD, is often preferable.
What You Should Do
In a word, nothing.
Here’s the reality of the situation: The only way you’re losing out in this is if you sell. Until then, everything is Monopoly money – it doesn’t really matter.
Pulling your money out of the market is how you solidify your losses. Unless you absolutely have to, it’s best to ride things out.
This is also why annual rebalancing and shifting your asset allocation to align with your risk profile – especially as your time horizon shortens and you look at retirement – is important.
What are we doing? See above advice.
We’re continuing to max out retirement accounts and will continue to dollar cost average into the market.
Other Things To Keep In Mind
An 8% drop in the market in a short time is noteworthy but this isn’t recession territory yet. However, it’s not a bad time to still consider how to prepare for one.
On average, bull markets (periods of time when the market goes up) last about 8 years. Bear markets last about a year and a half. Of course, these are averages for the US market, but it’s still a good frame of reference.
We exited the last bear market in March 2009, putting us right on track for a bear basically any time. But nobody knows with precision when that’ll be. Don’t listen to anyone who does.
But eventually, from what we’ve seen in the past, it’ll happen. When that happens, here are a few good pointers:
- Don’t panic. Don’t sell unless you absolutely must to sustain yourself. If you can ride out the bear, you’ll be rewarded in the subsequent bull market.
- Keep putting money into the market as you would. Market timing is a fool’s errand. People who try to time the market tend to always miss the top, miss the bottom, and miss out on returns.
- People lose jobs during recessions. It’s a tough thing, and it can happen to anyone. Keep this in mind when taking advantage of ‘sale’ prices on stocks. If you can, you’re lucky. Not everyone is so fortunate.
- Consider bulking up your emergency fund a little bit, particularly if you don’t have diversified income streams (side hustles, etc.)
- Personal Capital makes it tempting, but don’t freak out about checking your investments every day. It doesn’t really matter in the short-term. It shouldn’t change your behavior.
Just Keep Your Cool and Carry On
I don’t even keep up with the market news on a daily basis because it tends to be inconsequential to our investment strategy. Our time horizon is sufficiently long that I’m fine a market down-turn as far as our portfolio balance goes.
When people see their money disappear, the first thing most do is react. They think about cutting their losses, making sure their portfolios don’t go down.
But in the process, they shoot themselves in the foot by exiting before their original time horizon said to and making those losses real losses. Solidifying your investment strategy before a downturn shows up is a great way to not be phased by them as they happen.
Because they will, as the past few days have shown. Stay strong, keep your cool, and carry on.
What’s your strategy when stocks drop? Do you watch the market on a daily basis?