Don’t Fear Stock Market Downturns
There are several reasons not to pay attention to the news. Anyone looking at headlines lately can’t miss seeing headlines like Dow plunges, stock market suffers worst one day drop since 2008, US stocks tumble on global slowdown fears. If hearing that makes you want to stuff money under the mattress, you’re not alone. Fear is a huge motivator when it comes to investing. We work hard for our money, and it’s painful to see balances plummet due to unforeseen events that we don’t even really understand. As hard as it may be, don’t fear stock market downturns.
I’m sure our parents and grandparents have many stories of watching the economy and stock market fall and recover. In my adult life, I only have one period of turmoil under my belt, but it was a doozy.
Living Through a Stock Market Melt Down
At the beginning of 2008, I was a new Mom who owned a business. Most of my free time was spent trying to figure out how to keep all the plates in my life spinning. We were seriously in debt and almost living paycheck to paycheck, even though our income was pretty high. The one bright spot in the financial picture was my retirement account.
I hadn’t ever maxed it out at that point but had began contributing as soon as I got my first real job. With the company match, it had grown to a respectable amount. Then, toward the end of that year, financial hell was unleashed. Companies were crumbling. Jobs were being shed at a rapid pace. People were losing their homes. I had no idea if my business would keep paying the bills.
Despite all the negativity, the hardest part for me was seeing my retirement account balance lose over a third of its value. This was way before I got my head out of the sand and actually studied stocks or market returns. All I could see was minus signs and red on the quarterly statements. I came very close to pulling what was left and sticking it in a money market fund. It was a classic knee jerk reaction that many, many people followed through on.
Keeping a Level Head During Turbulent Times
The reason I didn’t jump ship was because my former boss and mentor talked me into staying the course. Obviously, this wasn’t his first rodeo, and he didn’t want me to make a huge mistake that would impact me for the next few decades. So what did I do?
- Quit looking at daily fluctuations and reading articles about how dire the economy was. I had no control over global events and needed to focus on things I could control.
- Took the advice of someone much wiser than me and kept investing, even increasing my contributions, during the downturn.
- Put more effort into my business. Even though I felt maxed out emotionally, I made an effort to get more involved in networking groups and events to drive in patients. Although 2008 and 2009 were not tremendous growth years, we held steady. I guess health care is a recession proof job.
What Does This Mean in 2015?
I don’t think the economy is going to go back to 2008, but we are due for some market corrections. After seeing my retirement balance sink during that turbulent time, I’ve been overjoyed to see it rebound and then some.
Remember to view downturns like discount periods. Money is never lost in the stock market until you sell. Holdings may be worth less at the moment, but you still own the exact same number of stocks as you did before a market correction. If you can hold on or even buy more when prices are low, you’ll have a great return on investment once prices go back up. If you bail and sell as prices are going down, you’ll never be able to get that value back.
This advice only works if you are planning on leaving money in the stock market for ten years or more. If you need invested money before then, it’s important to have a conservative mix of bonds, cash, or other stable investments. Certainly don’t rebalance it all right now while the market is down, but look into changing your investment allocations if money you’ll need soon is heavy in stocks.
If that sounds too complicated, consider using a platform such as Betterment where you can easily select your risk tolerance, goals, and have investments chosen that fit your time frame.
One of the positive things about being over 40 is having enough life experience not to fear things that are beyond my control, stock market included. All anyone can do is set up for the best possible outcome and try to ignore all the hype and hoopla media outlets try to sell. If you are a long term investor, there is absolutely no reason to fear a stock market downturn.
Did you see investments fall in 2008? Have you ever sold as a reaction to a market downturn?
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We don’t have to fear stock market downturns but we have to pay attention to the consequences of such fallouts. For example, what happened Monday with China is extremely dangerous, we can’t help but paying attention to this kind of event.
While there are certainly a lot of millennials that struggle with distrust of the stock market, I think the 50somethings and 60somethings are the ones who are going to struggle most when the market crashes. The pressure to “cash out” hits them the hardest because they are so close to retirement and they see a sizable amount of value wiped out in a short period of time. I think it’s important for those nearing retirement to realize they wont’ be cashing out everything all at once. Sure, they may lose a bit in the short-term but the stocks they will cash out 10 or 20 years down the road have a lot of time to rebound (and then some).
I can’t imagine how hard it would be to see 30% less of your retirement balance if you were ready to retire. Good point about not needing to cash out all at once, even when you do retire.
During the last downturn, we were in the middle of Alaska without any way to sell off our stocks/bonds. But because we are buy and hold investors in primary bonds and dividend paying stock, we wouldn’t have sold anyway. The dividends and interest just kept right on coming and any “loss” we incurred was simply on paper. Everything recovered and increased in value until this Monday. However, we will use the same strategy. We invest in the company, not the market.
I bet there are lots of people who wish they had been in Alaska and couldn’t sell during that time.
This is the first correction/downturn I’ve experienced as an investor (I started saving in 2007 but didn’t get into the stock market until January 2009 – good timing!). I definitely don’t like the lower investment balance/net worth numbers Mint is showing me, but we are going to stay the course and keep dollar-cost averaging our way in! We’re not treating this period any differently than the bull market of the last many years.
You’ll be happy in a few years that you kept investing.
This whole stock market drop off has been an interesting time for me. I started investing in 2009, and everything has been going up up up since then. I really haven’t felt a real downturn until now, but I’m glad I keep up with blogs and read smart financial authors to know that this is no time to sell if you have a long term horizon. In fact, it is the WORST time to sell. So I’m just going to stand pat and be fully invested in the market as I always have been.
It is entertaining to watch the news reports and see everyone breathlessly give their take.
News has almost gotten as bad as reality TV. Anything that gets attention is put in the spotlight. Unfortunately, negative attention is what gets the most publicity.
Like Gretchen said, I view times like this as a sale. As a long-term investor this can be a time of great opportunity or you can simply ignore it as it means little in the grand scheme. I spoke to way too many investors who sold everything in 2008 and end up sitting out the ride back up – the sad thing is the amount of return they lost out on as a result.
I know a few people who cashed out as well. Some of them used their retirement to buy a house or a car, figuring they would have to keep working forever anyway so why not splurge? I’m sure they don’t feel that way now.
great advice! It’s important to ignore the constant talk of stocks falling and keep your overall investment strategy.
If you do that, you’ll almost always come out ahead.
A stock market downturn is like a shoes sale, but for PF nerds! Whenever there’s something bad in the news about a certain company, I look at it like “time to buy!”
If we could only know when the true rock bottom was going to hit…..