Navigating Your First Market Downturn
What. A. Week.
We are IN it, folks.
I didn’t really have money to lose during the 2020 Covid downturn, so it didn’t hurt much.
That was not the case last week.
- Economic uncertainty
- Red investment accounts
- A news apparatus flooding your phones with reminders of both
What could go wrong?
How are we dealing with it?
How should you be thinking about it?
My thoughts below:
Step 1: Remind Yourself Why You Are Investing
Each of you will be different, but likely some combo of:
- Retirement
- Dream Vacations
- Home Down-Payment
- Funds to Care for Family
Remember: We are not investing solely for “the number in your account to get bigger”.
That’s important to remember when the number in your account gets smaller and you start to panic.
Panicking is human, but for investing it’s often not helpful.
Decisions in these moments define decades of investment returns. It is imperative to not make them hastily.
Step 2: Remember Volatility
Volatility is the price we pay for long-term gains.
Volatility, aka a 10% drop in 2 days, followed by a 9% 1-day gain, followed by a 4% drop, is what we have to go through for the eventual gains that long-term investing historically provides.
Big drops happen frequently.
They hurt.
But they get better.
Here is a table of 8 large S&P 500 drops since 2002:
Yet this is a chart of the S&P 500 since 2000:
If you have a long enough time-horizon, the market has always rebounded and grown.
This fact has been true since before the Great Depression.
Step 3: Check Your Timelines
The stock market bouncing back eventually is fine for your retirement dollars.
It’s not fine for your dollars if you’re trying to buy a car or a house soon.
Our dollars need to be invested based on our different timelines.
If retirement is decades away, studies say you should be in equity index funds like:
- S&P 500 Fund (like FXAIX)
- Total Stock Market Fund (like VTSAX)
- International/Emerging Funds (like FSPSX)
Those dollars can outlast the volatility.
For 5-10 Year Horizons, investment professionals may recommend those dollars to mix in bonds and less volatile assets. A sample portfolio could be:
- 80% Equity Index Funds (from above)
- 20% Bond Funds (like FXNAX)
What about short-term dollars? Historically, the stock market has a ~90% chance of being positive in a 5-year span (Source: Capital Wealth Advisors).
Those are good odds, but not perfect odds.
If we need money within 5 years, we are in money preservation mode as opposed to growth mode.
Most advisors would tell clients to put their <5 Year dollars across a mix of cash, bonds, and equities.
The cash and bonds will mitigate any major equity fluctuations.
Step 4: Now, and Only Now, Can You Do Something
Do your current investments match your timeline goals?
If not, it might be worth a call to customer service at Schwab/Fidelity/Vanguard.
As for my wife and I:
- We aren’t touching our retirement accounts.
- We aren’t selling any stock.
- But we are changing where our new brokerage account dollars go.
Each month, we auto-invest into a brokerage account (reminder on what that is here).
We’ll use most of those dollars for a home down payment one day.
We lost a large chunk of those dollars in the last week.
So, in an effort to diversify out of the S&P 500, we are investing each additional dollar into a Money Market Account (SPAXX).
This is our way of diversifying out of stocks: Not by selling stocks we currently own, but by investing our additional dollars differently.
Everyone will be different. This is a GREAT time to reach out to your brokerage firm and get a clear understanding of your investments and time horizons.
But I’ll leave you with three reminders no matter who you are:
- Selling after a big drop is historically bad for your long-term gains
- Trying to perfectly time buying back into the market is historically bad for your long-term gains
- Not investing at all is historically bad for your long-term gains
As much as times like this make us want to do something, the best strategy might be doing nothing.
As I’ve written about previously, Buying and Holding the S&P 500 is terrifying.
This is one of those terrifying moments.
Hang on!
