By Matthew Theal, CFP®
October, as is usually the case historically, was a rough month for stock markets across the world. The S&P 500 declined a little over 9% at its worst point.
Who knows what the real reason is? Rising interest rates? Maybe. Concerns regarding the election? Plausible. The point is nobody knows.
But for some reason, whenever stock markets start to drop, people freak out. After 10-plus years in the industry, it baffles me to this day.
As I wrote in 20016: “ Do you run out of Target or Macy’s when there is a sale? That is what you are doing if you sell stocks during a market sell-off. You are running from a sale. Remember, the goal of investing is to buy low and sell high.”
The standard talking point we hear from clients is “I want to get out of the market because it’s going down and I don’t want to lose all my money.” Great, I understand, but has the stock market ever gone to zero in its 120-year-plus history?
The answer is no.
I like to blame the panic on the media. Nobody is watching or reading the financial news when markets are going higher. People only tune in when it’s scary. I started my career in financial media, and we would cheer for significant drops in stock markets because it meant more eyeballs, which led to higher revenue.
Unknown to most investors, research has shown that in the long run, you are better off not touching your portfolio when the market is declining. Why is that?
Because most of the stock market’s best return days come after a sell-off. Take a look at the chart below. It shows that if you miss the best days in the stock market, you dramatically decrease your returns.
Basically, it’s buy-and-hold or use a CD or savings account!
We know investing is tough. Pretty much everyone who invests has seen their portfolios decrease in value this month. So luckily, last time this happened in 2016, we gave our clients some tips. They still work today.
- Contribute to your account. Down markets are the best time to contribute to your investment account. You could benefit from buying at lower prices. We love a dollar cost averaging strategy.
- Ignore the media. The job of the television, online and print media is to get you to watch, read, and click. The producers and editors are smart—they know if they have scary stories with scary headlines, you will watch, click, and read. Don’t fall into their traps. It’s never as bad as it seems.
- Don’t dwell on your account balance. I know some people who check their account balances hourly. Don’t be that person. When you’re invested in stocks and bonds, the value of your account will change every minute. Don’t stress about the day-to-day volatility of the market. Instead of obsessing over how much money you have this second, think about how much you will have in the future if you leave your account alone and let it grow.
- Don’t pay attention to your peers’ opinions. We all have the annoying neighbor. Maybe they live next door, or maybe they sit in the cubicle across from you. This annoying person always has an opinion and still can convince you they are right (they hardly are ever correct). Don’t listen to them. Your situation is unique and completely different from theirs.
- Don’t panic-sell. When we create financial plans for clients, we don’t say, “Sell when stocks are going down.” Our philosophy is to be a long-term passive investor.
- Don’t overthink it. Lastly, don’t overthink your investments. Investing is simple, and often we make it more complicated than it needs to be. Invest in a low-fee, globally diversified portfolio. Once done with that step, let the portfolio age like a bottle of fine wine.