So the stock market has officially had a “correction” over the last few weeks which is a 10% drop from the previous high. And many people are panicked! But panicking after a big drop in the market can be very bad for your long term retirement account. Especially if that panic involved pulling your money (10% less than you had 4 weeks ago) out of the stock market.
This might sound weird but I actually got excited when the stock market took it’s big tumbles over the last few weeks. I have been waiting for a good opportunity to “buy low” in the stock market. Yes, now is the best time to put extra money into your retirement investment account. Buying shares in a time like this is like when your favorite store has a 10% off your entire purchase sale! Basically, you get the same items for a lower cost.
There are a few reason why I don’t panic when the stock market goes down.
First, I understand that the stock market has always come back from corrections and crashes to reach new highs. Along with that, I know that the stock market as tracked by the S&P 500 has made over 10% per year on average over the last 30 years. I often get asked by people, what if it just keeps going down and I lose all my money? Investing in a diversified mix of over 12,000 stocks makes it very unlikely for you to lose all of your money. What are the odds that 12,000 companies across the world in different sectors providing different products all go bankrupt at the same time?
Second, I know I am in this for the long haul. Every investor is at a different place and will use their money for different things. If you are needing the money you have invested in the next few years, you should definitely not have a vast majority of your money in stocks. But either way, you can be invested for the long haul. Even throughout retirement, yes have a big chunk of your money in bonds, but why wouldn’t you stay invested and give your money a chance to grow and keep up with inflation. Smart people look at investing as a lifelong thing.
Third, I don’t believe that me or anyone else can accurately predict the future. This is a big one. I get asked all the time innocent questions about investing and the stock market from clients and others that are all based around predicting the future. Questions such as, is this going to end up being a crash? Do you think stocks are overpriced? How much do you think a diversified mix of stocks will make this year? When I answer this question by saying I cannot predict the future, people are usually not satisfied. The great thing about it is that you do not need a prediction about the future to be a successful investor and make money in the stock market.
Lastly, I believe in the phrase, buy low and sell high. It is usually the hard thing to do at the time. When the stock market is crashing down and you see the headlines say, this is the biggest drop in the Dow in its history, it isn’t necessarily an easy thing to buy stocks on that day. On the opposite end, when the market is up for 2 straight years and the economy looks great and the headlines say, this is just the beginning for stocks, it isn’t easy to rebalance your portfolio and thus sell stocks and buy bonds.
Ultimately, we know there are going to be stock market ups and downs in the short term, but if you have a low cost diversified mix of stocks you will be doing alright in the long term.
By Jimmy Hancock
1. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.