When the market starts to go down, it can be hard to keep emotions out of your decision-making. The money you have worked hard for starts going down and irrationality sets in. You tend to think worst-case scenario. “If the market is down 10% in a month, then I’ll be out of money in 10 months.” It sounds ridiculous when you type it out, but that type of emotional response can cause you to make unwise decisions when it comes to your portfolio. When the market is taking a downturn it’s important to remember three things.
One, This is Normal!
This has happened before, and it will happen again. Investing is fun when things are on the rise, but that excitement stops when the market starts to go down. The headlines are negative, and you are smack dab in the middle of a market freefall. You immediately begin to think worst-case scenario. Even though you have gone through market cycles before, you forget the prior downs. “This one just feels different.” They may feel different in regards to the length of the downturn, or how quickly it happened, but a downturn in the market is incredibly common.
A 2019 report from Guggenheim showed there were 84 declines of 5-10% in the S&P 500 index since 1946. That works out to more than once per year. That means 5-10% declines are more common than your birthday! The time it takes to recover from those downturns averages 1 month. That same report showed a downturn of 10-20% has happened 29 times since 1946 with an average recovery time of 4 months. Here is a graph to help you visualize the frequency of different downturns. Bottom line – we are no stranger to market downturns.
DECLINES IN THE S&P 500 SINCE 1946
|Decline||# of times||Average # of months to recover|
Two, Stay Invested
The second tip is to stay invested and not make reactive decisions. When markets bounce up and down, we try to guess when the market will be at its low. Obviously, that’s impossible. The only way to ensure that you don’t miss the best days in the market is to be invested. According to the Ned Davis Research Group, a fully invested stock portfolio in the twelve months following a bear market earns a total return of 37.1%. However, if you were on the sidelines for the first six months of this rebound your total return would have been 7.6%. You may think, “Well I wouldn’t miss six months, maybe just a couple of days.” That can also be detrimental to your overall return. Over the twenty years from January of 1999 to December 2019, if you stayed invested in the S&P 500 index you would have an average annual return of 6.06%. If you missed only the 10 best days, that average annual return drops to 2.44%. What’s even more eye-opening is that if you missed the 20 best days, your average annual return would have been 0.08%. The only way to ensure you participate in the best days is to stay invested.
Three, Focus on YOUR Long-Term Plan
Tune out all the noise. Everything we see and read during volatile markets seems to incite fear. It can be hard to put things in perspective when everything seems to be negative.
There are always going to be those people who tell you what you “should” do when the market is volatile. They may seem like a know-it-all but there are plenty of things they do not know. They don’t know your risk tolerance, they don’t know what amount of money you need each month in retirement. They haven’t looked at what sources of income you’ll be receiving. Everything that is pertinent to your unique retirement plan tends to be left out of the conversation when you are receiving unsolicited advice.
One of the most important things to focus on is YOUR time horizon. When you have 20 more years to go before you need income from your account, you can better tolerate fluctuation. You have more time to allow your account to rebound from a downturn. No one likes seeing their accounts go down but remember you don’t need the money at the current time. You plan to use this money at a much later time which is why you were allocated this way, to begin with.
Going through bear markets is never fun. Keeping perspective and focusing on your overall goal and time horizon can help you to be more comfortable when they inevitably occur.
If you stay cognizant of these three tips you will be better emotionally equipped to handle the inevitable downturns. Knowing these three tips is one thing, but acting on them is a different ballgame. One great way to combat the emotional aspect of investing in down markets is to do so on a predetermined plan. When you have a plan that you are sticking to it tends to take the emotions out of the equation. The plan was made during a calmer time, all you need to do is execute it. It’s similar to making a shopping list. If you go to the grocery store hungry with no list, you are making an impulse buy after an impulse buy. If you have a shopping list, all you are doing is executing that list.
In times of uncertainty, it’s important to remember, to control what you can. There was an article about the hoarding of materials that have occurred during the pandemic and the thought process behind it. It all comes down to control or at least the illusion of it. Having hundreds of toilet paper rolls isn’t necessary but it gives people a sense of control during unprecedented uncertain times.
Take control of your financial future by creating a plan and sticking to it even when times are rough. You will thank yourself in the long run.
I hope that these three simple steps were helpful and easy to understand. However, if you find yourself still questioning or needing a sounding board, we are here to help.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.