How to Remain Steady When the Stock Market Drops
You are an intelligent person and therefore understand the stock market is not just for the wealthy. Yet, a part of you can’t help but hesitate when the stock market hits the occasional slump. What do you do when so-called experts scream gloom and doom? This might be keeping you from getting into the stock market, so let’s walk through some of these fears.
2015 was not a great year for the stock market. Looking back, It was one of the worst since 2008. But, when you woke up this morning, did you find yourself thinking about this? It’s unlikely, because life moved on. Recovery likely looked different for different people, but recover they did. Because the stock market is a cycle.
When the stock market experiences cyclical dips, it is important to remember the stock market continues to deliver better returns than most investment strategies out there, and yes, statistics show even people who lost money in 2008 eventually got their money back.
What do you do when the financial headlines scream bloody murder?
Hang in there.
What?!
Yes, hang in there. Stock market investing was never meant to be a short-term investment vehicle. That’s why you would never drop money in the stock market today in hopes of building enough cash to buy a car in six months. You want at least five years to let the beauty of compound interest begin working its magic. Short of a total economic collapse, your funds would rebuild themselves, and frankly, if we ever faced a total economic collapse, you would have more pressing problems than the value of your stock portfolio.
There are at least two groups of people who should fear a drop in the market:
First, people who pick individual stocks and mutual funds should feel a little worried. Very few people ever beat the market, and those who do rarely repeat the performance. If your funds are tied up in individual companies, I hope you:
- Have the time to stay on top of their balance sheets;
- Had enough sense to pick no more than five stocks; and
- diversified your holdings across different industries.
A better strategy is to invest your money in index funds. These are essentially baskets that hold shares of broad sectors. I personally own Vanguard’s Total Stock Market and Total Bond Market funds. You’ll never beat the market with index funds, but then again, the market will never beat you. Also, by investing in index funds, you forego the fees that come from actively managed mutual funds.
People who hang on every word of financial talking heads should also feel paranoid. Fluctuating markets make for sensational headlines, and these so-called experts love nothing more than to spell out worst case scenarios. Often times these talking heads would love nothing more than to take advantage of market drops to sell you their own financial investment products they guarantee can weather the next storm.
Remember, the best way to weather the storm is to do nothing. Or, if you’re going to do something, keep investing like normal. It’s the most counterintuitive thing you’ll ever do, but while everyone else is pulling out, you’ll continue putting money into your investments and will therefore benefit when the market inevitably starts swinging back up.
Tim Van Pelt over at The Simple Dollar said it best when he said: “a solid financial plan is boring.”
Final Thoughts
I am in no way suggesting the stock market is a sole means of guaranteed wealth. Anyone who says otherwise has no business dispensing financial tips. What I am saying is to remember the market experiences cyclical change not unlike so many other aspects of your life.
The closer you draw to retirement, the more necessary it will become to keep tabs on your income. You will rely a little less on stocks and more on bonds and other conservative investments, but do not succumb to kneejerk reactions that prematurely pull you out of healthy returns on your hard-earned money.
There is a time and place for stock market investment. You should not invest in the stock market if you are paying off high-interest debt. It may also not be your top priority if you have not built an emergency fund. If you are a lot closer to retirement, you may want to focus on more conservative investment options.
If you are young, with years before retirement, the stock market is your best friend long-term. Don’t pass on the opportunity. I look forward to your thoughts in the comments.
Book Recommendation
If you want to read a book on learning about investing, with an emphasis on the stock market and index funds, give this classic a try:
Note that is an Amazon affiliate link.
The highest praise I can give a book is to say I read it over and over. It is full of practical advice with just enough theory to help you understand the rationale behind the author’s advice. You do not have to be an expert to enjoy this book, and if you are an expert, you will appreciate the practical strategies that might help reaffirm or readjust your current plan. Buy it, and let me know what you think in the comments.
