Special Release - Sky is (Not) Falling
I was walking down the hall at work and one of my co-workers, who was watching the stock market drop, asked me if they should still contribute to their 401(k). Without hesitation, I said, “Yes, of course.” But this was not the first time I’ve heard that people want to stop contributing to their retirement plans because of stock market conditions. Which means that there’s an opportunity to provide a little education and context and maybe convince some people to not act out of fear.
First, it is important to figure out why a person has a certain reaction. Is it the immediacy of the situation? Herd mentality? Or something else altogether? You may not be calmed by the fact that time, in general, erases stock market losses because you feel like you do not have the kind of time required. Or you may have major FOMO (fear of missing out) when you feel like the smart money is exiting the market. But you don’t really know how to address the question of when to get back in without missing out (again). So, how do you not make poor decisions when every part of you wants to take the money and run?
While this market turmoil may be dependent on a different set of circumstances, looking back to the past can give us some perspective of what we may expect going forward (note that past performance is not a guarantee of future results). Historically, there hasn’t been a 15-year period in which an investor has lost money in the stock market since 1926. Looking at a shorter time frame of five-years, the percentage of periods with a loss is just 13 percent, which increases to 27 percent for one-year periods (Source: Morningstar). You may not like the shorter time period odds, but if you can wrap your brain around the fact that history is on the side of winning, then you may be able to look the other way for a while.
Similarly, the idea of trying to time the market can have unintended consequences. Studies show that investors may be able to avoid a market bottom by moving to cash. However, they have a greater potential to miss the upside when it eventually comes, exaggerating existing losses or blunting gains. So you have to ask yourself, are you better at predicting market moves than the multitudes of finance professionals who advocate staying the course? It is not an easy path, but remember, time and history are on your side.
A lot of people feel uneasy about market volatility. Feel free to reach out and talk with one of our financial planners or investment professionals on how to approach your particular investment portfolio.
Lauricella, T. “Stock Investing for the Long Term: 3 Charts on Bear Markets, Losses vs. Gains and Market Timing.” Morningstar Office, 13 March 2020. Accessed at https://office.morningstar.com/research/doc/972104/Stock-Investing-for-the-Long-Term-3-Charts-on-Bear-Markets-Losses-vs-Gains-and-Market-Timing
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