The market celebrated the New Year by dropping 9% right out of the gate… It’s the worst start to a year ever… And the market is now at its lowest level since late 2014.
It’s natural to worry when the stock market has been down nearly everyday this year.
But regardless of how long you’ve been investing, it’s hard to accept that nothing unusual is happening in the market.
Declines of 10%-20% don’t signal the end of prosperity. They are normal market movements. And so long as you you hold high-quality, long-term investments in your investment accounts, you have nothing to worry about.
Building wealth comes from holding for the long term – including through market dips.
But I understand, it’s hard keeping calm. Especially since there’s so much to worry about….
Economic slowdown in China, lack of growth in Europe, collapsing oil prices, rising interest rates, ISIS, declining profit margins, extended valuations, stagnant wages, growing economic inequality, Hillary Clinton becoming president…or worse, Donald Trump!
If you watch CNBC, everyday they will have some talking head telling you how this is the just the beginning of the next crash, and how it’s going to be a repeat of 2008.
Someone like Peter Schiff, Dennis Gartman, or Marc Faber. Whoever they are, they will be welcomed as an expert, and will be extremely pessimistic about the current economic environment, and have convincing reasons why we should sell everything.
Fear sells. Research shows we pay more attention to negative news or headlines.
We’re hardwired to believe pessimists. Someone with a pessimistic point of view always appears smarter, and we give them credit for digging below the surface. On the other hand, optimists appear as intellectually lazy, cheerleaders for the market.
Maybe there’s an evolutionary benefit to believing naysayers. Healthy skepticism is what keeps us alive and out of harm’s way.
Except when you take it too far.
And they will never tell you the track record of their so-called “expert”.
Consider these doomsday headlines from Marc Faber:
- Faber on Hyperinflation: “Not A Matter Of If But When” -Business Insider, 9/23/2010
- ‘The Bear Market Is Starting’ Marc Faber -CNBC, August 3, 2011
- Faber: The Dollar’s Value In The Future Will Be Zero -Business Insider, 4/18/ 2011
- Marc Faber: We Could Experience A 1987-Style Crash This Year -Business Insider, 5/10/2012
- Marc Faber: Look out! A 1987-style crash is coming. -CNBC, August 8, 2013
- 2014 crash will be worse than 1987’s: Marc Faber -CNBC, April 10, 2014
- Dr. Doom calls bubble, adding to gloomy calls -CNBC, Nov 2, 2015
Every year, like a broken record, he has predicted an impending crash in the market.
If you had listened to Faber, you would have gotten out of the markets six years ago and missed one of the biggest bull markets of your life.
Eventually, he’ll be right.
But it doesn’t pay to panic and sell your investments just because there’s a chance of a major crash.
Since 1950, the market has experienced 147 declines of 5% or more, 40 “market corrections” of 10% or more, and 11 “bear markets” of a 20% drop.
We can learn a few things from these numbers.
First, the current market correction is normal. It happens, on average, every year and a half.
Second, it’d next to impossible to avoid these by “trading around them”.
If the market falls 5% and you sell your stocks in a panic… you would have been wrong 73% of the time. In 107 out of 147 pullbacks, a 5% fall represents the bottom, and then the market rebounds… So you would have sold low, and the market would have recovered without you.
Say you’re braver than that, and you wait until until the market falls 10% to sell. This would mean that you’re trying to avoid a bear market drop of 20%. Even then, you’d be wrong 72.5% of the time – only 11 out of 40 pullbacks of 10% or more turn into a bear market. And again, the market will rise without you.
In fact, you probably would have sold out last Wednesday, and missed the tremendous rally on Thursday and Friday, where the S&P 500 index gained almost 5% from the midweek lows.
Selling in a panic almost never pays off.
As I’ve mentioned before, you never want to let your emotions get the better of you. Successful investing requires patience, a process/strategy, and discipline.
Don’t let the talking heads on CNBC (half of whom have paid to be a “guest”) scare you out of your investments, or process.
If anything, a major decline is an opportunity to buy stellar global companies at a discount.
Since 2010, stock market volatility has been significantly lower than normal, possibly caused by Quantitative Easing. (Quantitative Easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply). Since the Federal Reserve has ended this program, and embarked on the quest for higher interest rates, I expect volatility to return.
You should expect the volatility of past 3 months to continue. If anything, the market might be more volatile than normal, probably for the next year or two.
Even if the current correction turns into a major bear market, within 2 years, on average, you’ll be back where you were before the decline started. And during that time, your contributions and reinvested dividends will be buying stocks at a discount.
The stock market is the only market where shoppers run out of the store the minute everything goes on sale!
If you’re already in retirement, or just on the verge of retiring, a big decline may impact your retirement planning. However, your allocation of stocks and bonds should have already been appropriately adjusted to enable you to live off your bond/cash until the market recovers. Depending on the severity, you may have to reduce your spending, but these too should have been predetermined and should not come as a surprise.
For everyone else, especially those who are many decades away from retirement, a long, protracted bear market will set you up for spectacular returns in the future.
So turn off your TV, stick to your investment process, and pray for a major decline in the stock market.