Do Nothing? The Stock Market and You
YOU MIGHT HAVE NOTICED THAT THE STOCK MARKETS HAVE STARTED OFF THIS YEAR WITH LOSSES. And last August and September was another period of loss as well. So what do you do? While there are different ways to think of this, I would suggest that you evaluate how you respond to losses with the following three words:
UNDERSTAND. This type of behavior with the stock market is in no way unusual. It just isn’t. This is the deal. This is precisely what happens with assets that can be traded this easily and subject to speculation. There have been lengthy periods of virtually no gain in the Dow Jones – from the late 20’s to the early ’50’s – from the early 70’s to the early ’80’s. There have also been periods of significant growth – both the 80’s and the 90’s. (Generally speaking the markets have been up close to 70% of the time).
During these times, there have been days, weeks, and months of extreme gain and loss. Periods where people are satisfied with their investments and other periods where they feel dread and anxiety. In retrospect, it can be easy to understand why these movements happened, but forecasting these events is virtually impossible. (And if someone could do this with any meaningful consistency, why would they tell anyone??) The bonus for the long term investor is that market selloffs are important and valuable. They represent great opportunities to purchase stocks at a reduced value. For many that have been saving for 20 years now, their greatest gains have come from the market losses that occurred from 2000 through 2003 and 2008 through 2009.
BELIEVE. If you invest in the stock markets and you do not believe that they will be higher in the future when you need your money than today when you put your money in, why are you investing in the first place? Seriously? I don’t mean to imply that you should have a spiritual commitment to your investments, but you should certainly have confidence. That makes sense, doesn’t it? If you don’t have confidence in your investments, then it is time to change them.
You have alternatives. You don’t have to invest in the markets just because it is the conventional wisdom, or everyone else does, or it seems like you should. You can move more of your funds to fixed investments like bonds or bond funds or savings type accounts like CD’s or stable value funds. It’s ok. If these kind of losses help you realize that market based investing is not for you, it is better to change your investments than to stop investing.
NOTHING. Of course, this is really what you should do. You probably already knew this though. If you have a basic understanding of market investments and their history of performance and believe in them, you don’t have to do anything. Just move on with your life – go about your business. This is what most do.
What are you going to do anyway? Get out of the markets now, after they have sold off, and then get back in later after they have gone up? Do I need to tell you that this is not exactly a smart strategy. It sounds easy enough, but the market is so full of false starts and selloffs that this is a fool’s game. Finally, make sure you avoid those in the financial services industry that take advantage of these circumstances to pitch expensive products or solutions that sound appealing during times of market losses.