Wait … Stocks Go Down?
The stock market has taken us for a bit of a rough ride recently.
You might be wondering whether you should sell everything. To stop the bleeding.
I’ll expand a bit more below, but I think the summary is fairly simple: Stick to your plan, as long as you have a well-balanced portfolio that’s appropriate for you.
Remember, nothing lasts forever. Whether that’s the stock market’s meteoric rise during most of 2020-2021, or the market’s more recent decline.
As to when we’ll get through this particular decline, I don’t know. It could end tomorrow or it could end next year.
But if we look to history, the current downturn is completely normal. This is what the stock market does from time to time. Even though it hurts, it’s important to remember that this is business as usual.
History also has told us that the stock market inevitably recovers and goes on to create new record highs, driven by the same dynamics that make stock markets work in the first place. That’s also business as usual. And I want to make sure I’m invested for whenever that happens.
Now, let’s expand a bit.
First, the more technical (and, frankly, less important) stuff
Things do look concerning:
There are indications that the economy may be entering a recession, though of course it’s not a certainty.
If there is a recession, that’s most likely bad news for stocks.
Inflation being so high is also concerning.
Usually during recessions, bonds tend to do well. But inflation tends to be bad news for bonds.
If there’s a recession at the same time as high inflation, both stocks & bonds will probably suffer.
So far, we’ve had a fairly “normal” correction for most of the stock market, but the more speculative parts of the markets have been hammered (tech stocks, Chinese stocks, meme stocks, crypto).
Having said that:
The answer to “will there be a recession?” is always yes. The question that’s harder to pin down is when it will occur.
One of the best ways to fight inflation is via stocks. Especially over longer periods of time, stocks are one of the main investments (along with real estate) that can keep up with (and overcome) higher inflation.
Nerdy thought: As noted above, bonds tend to do poorly at first with inflation. But bond funds are able to make up for the losses over time. As bonds in the mutual funds mature, the cash is reinvested in new bonds that pay a higher interest rate (due to interest rates rising). So there is a natural leveling-out that happens over time, eventually leading to better returns after the initial losses.
Asset allocation & diversification
Investments go up. Investments go down. It’s hard (alas, impossible) to predict which ones will do well at any given time. That’s where the concepts of asset allocation and diversification come in:
Instead of trying to divine what’s going to happen, I much prefer to make sure my assets are diversified at a high level.
If you’re appropriately balanced between the three major asset classes (Cash/Bonds, Stocks, and Real Estate), then I think you’re well-positioned for whatever may come.
Note: That doesn’t mean your portfolio won’t go down. It absolutely will at times, just like the farmer has a bad yield for their crops during some seasons. But it’s still best to keep planting those crops, because the yields could turn out great at any point, and you need the growth longer-term.
The role of stocks
It’s best to remember that any money you have in stocks should be for the long-term.
If you’re years from retirement, you won’t need that money for a long time.
If you’re already retired, it might be helpful to think about your investments as being in buckets, with the spending for the next several years coming from safer assets (cash + bonds). See this post for background on that concept: Investment Buckets During Retirement
If you have money invested in the stock market that you’ll need in the next several years, it would be best to take it out of there if you’re worried about losing the money. The place to put that money is cash (and maybe bonds).
Remember, stocks are both fantastic investments for the long-term AND completely unpredictable for the short-term.
What to do?
My overriding principle when it comes to a topic like this is that I’m not in the business of trying to predict the stock market. Short-term predictions are more often wrong than they are right, even by otherwise-brilliant economists.
Speaking from personal experience, if I sold my stocks every time I was worried about the stock market, my nest egg would be waaaaaaay smaller.
The stock market has a way of fooling people. Fortunes have been made when things have looked the bleakest. The pandemic is the latest example of this. People were terrified of owning stocks in March 2020, but then the market went almost straight up for the next year and a half.
Further market downturns from here may even provide some interesting opportunities, such as rebalancing investments, tax-harvesting losses, Roth conversions, and investing extra cash at lower market levels.
Bottom line
As long as you’re properly allocated for asset allocation purposes (see above), my approach would be to just ride this out. It may hurt in the short-term (or it may turn out great!), but, regardless, it’s the financially healthy thing to do.
While you’re at it, I’d suggest turning off the noise. Ignore the headlines, as they’ll probably make you worry more than you need to. They are short-term by nature, whereas your money in stocks is for the long-term.
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More resources:
If you’d like to dig into this topic further, I’d recommend the following two articles:
How to Handle Market Declines (source: Capital Group)
Markets in Turmoil (source: Creative Planning)