Should We Panic and Sell?
The market is at all-time highs
Government shutdown, AI-hype, and Credit Delinquencies Rising - is it time to get out of the market?
Makes sense to feel that way.
But we’re AWFUL at predicting the market.
“But Chris, it’s so obvious the market is about to tumble - I should just sell”
I get it.
There are a lot of current reasons to get out of the market and sell.
The problem is, there are ALWAYS a lot of reasons to get out of the market and sell.
Don’t believe me?
Think this time is special?
Look below at this chart.
Unfortunately, the world is always a complex and chaotic place. The road up is bumpy.
So bumpy In fact, that in 94% of the years since 1928 there was at least a 5% dip in the market.
9 of every 10 years had a drop that would cause panic.
What's wild? Shortly after those big one-day drops tend to be big one-day gains.
And if you’re on the sidelines “waiting it out”, you’ll miss it.
How important are these big one day gains?
Look at this closely.
|
Source Fidelity Investments |
If you miss just 5 of the best days in the above scenario, you lose over ⅓ of your gains.
Miss the best 50 days (just 0.38% of the total days) and miss out on 92.4% of your potential gains.
That’s insane.
What’s ironic is most of those best days happen at the VERY BEGINNING of a market upswing.
AKA if you wait for “good news” or “safety” or “calm” before investing again, you’ve missed the train.
“Okay Chris, the market always seems bleak and I don’t want to miss the good days. BUT what if I need the money soon? I don’t want to lose all of it right before I buy a car or house or vacation.”
Now you’re asking the right questions….
Contrary to popular belief, the goal of investing is not just to maximize your returns - it’s to maximize your returns within the timeline of your goals.
Your specific goals should always be the first consideration when answering questions about your investing approach.
Here’s how I’d approach investing based on a few broad timelines.
Short-Term (0-3 years)
The best thing you can do for your money in investing is give it time.
This chart perfectly illustrates that by showing us the longer you’re invested, the higher probability you are positive on your investments.
0-3 Years invested gives you a 60-80% chance of having positive returns invested in the S&P 500. Those are good odds, but not perfect.
So if I NEED the money in a short amount of time, I don’t want all of my money in stocks or index funds tied to stocks.
If a downturn came, I wouldn’t have the time to recoup my losses.
Instead, I’m putting 30-60% of my money towards less volatile assets like Money Market Accounts and Bonds.
They won’t go up as much as the stock market can. But they likely won’t go down as much either.
I’m increasing the chance my money is there when I need it.
Medium Term (3-10 Years)
Your car is good for now, but may not last another decade.
You are single now, but you’ll want to pay for a wedding soon enough.
You and your spouse are renting but want to make a run at buying a house 5 years from now.
Welcome to the messy middle of investment timing.
Too long to play it safe, to short to ride out all risk.
There have been LONG periods of bad investment returns within a 10 year period.
In this case, I still likely want to hedge my bets and ensure I’m prepped for the long-term.
Any money I need in this time period is likely going to be split: 60-90% in index funds and the rest in money market/bonds.
Long-Term (10+ Years)
History doesn’t guarantee future returns, but the last century has shown the market over time does go up and to the right.
So, our long-term investments (retirement, general savings) are probably safe taking the wild roller coaster ride. Even if a massive decline comes, you have decades to recover.
The market will always find new ways to scare us out. Elections, bubbles, and wars may cause fear.
But fear is not a strategy.
The best investors aren’t the ones who predict perfectly.
They are the ones who stay patient when others panic.
So, if recent headlines have you panicked, make sure your investments are aligned with your goals. Then let time do what it does best.
