We’ve been here before.
The stock market takes a nosedive and then bounces back.
But then it drops again.
After a period of increases, the benchmark stock market
indexes suddenly tanked last week, “slamming the brakes on a record-shattering
run that had lifted Wall Street to new heights.”
During past drops, people panicked and jumped out of the
market or they worried themselves sick wondering if they should bail.
Back in 1999, Fred Barbash, then the business editor for The
Washington Post, addressed investors’ anxiety about the stock market after
receiving a letter from a man who sold almost his entire portfolio after the
Dow Jones industrial average plunged nearly 267 points. “I’m tired of this buy
and hold bunk,” the man wrote.
“Sell if you must,” Barbash wrote. “But the swinging
pendulum of the Dow should not be the dispositive factor in our decisions.”
And what happened to those stocks the investor sold?
They all went back up — and then some.
“I tell random passersby to make use of boring index funds
and studiously ignore whatever’s happening this week or this month in the stock
market,” Harold Pollack, the Helen Ross professor at the School of Social
Service Administration at the University of Chicago, wrote in a PostEverything
piece in March, a few weeks after the financial markets plunged as the
coronavirus pandemic wreaked economic havoc across the globe.
The truth is nobody knows for certain what the stock market
will do at any given hour or day. You cannot time the market. So, the best
strategy is to develop a retirement plan and stick with it, ignoring the daily
ups and downs, just as Pollack recommends.
During this pandemic, I’ve regularly checked in with
financial professionals. For the investors still asking, “Should I stay or
should I go,” I’d like to revisit this advice.
Q: I’m afraid of losing all my money. Can I lose everything?
A: “Every investment has risks, but different investments
face different risks,” Ric Edelman, co-founder of Edelman Financial Engines,
said in April when the markets were down. “Stocks suffer from market risk, as
we’ve seen. Bonds suffer from interest rate risk. Foreign investments face
currency risk. Even bank accounts have risk — tax risk and inflation risk.
That’s the value of owning many different kinds of investments: It’s unlikely
every risk will occur at the same time. Keep in mind market crashes aren’t
permanent. After crashes occur, prices eventually rise, sometimes quickly
(after the crash of ’87, it took only a couple of months) and sometimes slowly
(after the crash of ’29, it took 15 years) — but usually a lot faster than
slower. So don’t assume that a crash means you’ve permanently lost everything
you had in stocks — unless you sell them while the prices are at their lowest.”
Q: What should I do if I have a decade or more to retire?
A: “Stocks are reliable if you have a time horizon of 10
years or longer,” Christine Benz, director of personal finance for Morningstar,
said in early August. “When we look at Morningstar’s database for ‘rolling’
10-year returns of the S&P 500 — meaning May 2010 to May 2020, June 2010 to
June 2020 and so on — there have been 23 10-year periods when stocks are
negative, out of 891 10-year observations since 1936. Most of those bad 10-year
periods occurred during the last financial crisis, and most of the losses were
quite small. The worst was March 1999 to March 2009, when the S&P 500 lost
3.42 percent on an annualized basis. Of course, there have been plenty of
periods in modern market history when stocks were in the black but would have
underperformed other asset classes, especially bonds. But starting bond yields
are so low that it’s difficult to imagine that being the case going forward, at
least for the next 10 years or so.”
Q: What if I’m retired or near retirement? What should I do?
A: “People who are drawing upon their portfolios in
retirement, or for any other near-term goal, are usually better off keeping
those near-term spending needs in the safe stuff — cash and bonds,” Benz said.
“That’s because when we look at stocks’ rolling-period returns over shorter
increments — say, three years or five years — stocks are too unreliable; the
probability of loss — and in turn, the risk that you’d need to sell your stocks
when they’re in a trough — is too high for comfort. That risk is arguably
enhanced today given the comeback that stocks have mounted since bottoming in
late March and given the pandemic and its related economic effects.”
Q: When the market goes down, is it a good time to invest?
A: “Bear markets can be an ideal time to increase
contributions to your workplace plan since you are buying cheaper shares,” Dan
Keady, chief financial planning strategist at TIAA, said in March when the
stock market was seeing daily declines. “This can benefit you when the market
recovers. If you can, try to increase your contribution now, even if it is not
intuitive.”
Q: Why is the market going down right now?
A: “We view the latest sell-off as a bout of profit-taking
after a strong run,” Mark Haefele, UBS Global Wealth Management’s chief
investment officer, wrote recently about drops in the stock market last week.
“The S&P 500 enjoyed its strongest August in 34 hours, gaining 7 percent,
and added a further 2.3 percent in the first two days of September, to reach a
fresh record high. Stocks are still well-supported by a combination of Fed
liquidity, attractive equity risk premiums, and an ongoing recovery as
economies reopen from the lockdowns.”
Q: What should I do right now?
A: “First and foremost, we recommend staying invested
according to your investment plan,” Haefele says. “Volatile markets can leave
some investors stuck on the sidelines, waiting for greater clarity or cheaper
equity prices. But rather than trying to time the market and potentially miss
out on gains, we recommend an averaging-in approach by establishing a set
schedule to commit capital to stocks within a 12-month time frame.”
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