So It’s Your First Market Hiccup. What Should You Do Now?
We’ve been here before. Stocks can fall fast and bounce back hard, even if they haven’t moved all that much or that quickly in recent years.Posted — Updated
We’ve been here before. Stocks can fall fast and bounce back hard, even if they haven’t moved all that much or that quickly in recent years.
And now, after watching the Standard & Poor’s 500 index fall by several percentage points since Thursday and bounce some of the way back Tuesday, you have a different kind of fear: that all the stock market riches have been won already or that your emotions will get the best of you amid all of the volatility. It’s tempting to sell what you have as quickly as possible to make that feeling go away.
But before you do, take a deep breath and ask yourself these six questions.
Watching the overall market numbers move up and down on television or the internet can be addictive. Even if your net worth is low, when the market goes up and down by a few percentage points in a day, there can be sizable dollar amounts at stake.
But part of what you’re trying to do here is avoid making panicked decisions. Big red or green arrows or commentators with raised voices generally don’t induce calm. Also, those talking heads know nothing about you and why you invested in the first place. So don’t base your actions on their pontificating and pronouncements.
Let’s say you’re in the first half of your career. You probably invested in stocks because over the very long haul, they deliver better returns than the other investment choices that are easily available to you at an online brokerage firm or through your workplace retirement plan.
When you buy stocks, you’re purchasing tiny little pieces of the profits that our capitalist system generates. Nothing about the events of the last few days suggests that the system is under siege. Quite the contrary: The markets may be spooked in part by the fact that the economy is humming along so nicely that companies will have to pay more for workers. That can hurt the profits that help drive stock prices and also lead to inflation.
The small overall decline in the stock market over the past few days pales in comparison with the large gains over the past few years. So hopefully you’re still on schedule to meet your goals, absent any big health or job changes.
This moment of checking your gut, however, is as good a time as any to consider whether you have the right proportion of your money in stocks versus other options like cash, bonds or real estate that don’t experience this kind of volatility or may not rise or fall in tandem with stocks. In other words, are you taking too much risk? Or too little? If so, buy or sell some stocks accordingly — not because of what the stock market will or will not do next but because you are or are not on track to pay for the things you want to buy someday.
Let me answer that one for you: No. Perhaps you got lucky with some individual stocks as a teenager or used what you learned in finance class to buy just the right mutual fund at exactly the right time.
Congratulations! But you’re almost certainly more lucky than you are smart. Professionals rarely do so well over 50 years that their decisions about when to get in and out of a stock lead to better performance than they might have achieved by just putting money into an index fund that buys every stock in a particular category. And you can’t know ahead of time whether you are that rare breed of market genius.
Still tempted to sell and wait out this latest market hiccup? Plenty of studies warn against this, including one that shows that missing out on just 10 of the best days in the stock market over 160,000 daily returns in 15 markets around the world can cause you to end up with about half of what you would have earned if you had stuck with an index fund over time.
Any decline hurts, even if it’s only on paper and you don’t plan on selling for decades. But consider everything else that might happen over that many years.
You will (hopefully) pay down your student loan debt. You will (hopefully) get promotions and raises or start a company that will increase your income. You will buy a home, and its value will probably go up over time, or at least match inflation. Or you’ll rent and draw dividends from the freedom and flexibility that brings you.
In other words, you are not the stock market. There is so much more to your net worth (and, hopefully, self-worth) than a bouncing S&P 500 chart. Check in with your life, and if it’s better than it was a year or five years ago, think about that if the stock market keeps falling.
Some of us (OK, me, although I do a good job of hiding it in my columns) are more anxiety-prone than others. And maybe there is only so far we can go toward suppressing those feelings.
So be it. Maybe holding stocks, or a high allocation of stocks in a college savings account for a 12-year-old (me again), isn’t right for you. That’s not a character flaw. But it does have ramifications. You may have to work more or work longer or take on a side hustle to meet your goals. If that doesn’t bother you, lower your stock holdings accordingly.
Above all, know yourself. The call to action at times like this may feel urgent. But chances are that if you’re new at this, you have many decades of investing ahead of you. So there’s no rush to make a buy or sell decision right this very second.
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