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How to Handle This (or Any) Stock Market Slump
It’s been a rough year for investors so far.
As I write this, the U.S. stock market is down more than 10% since Jan. 1. That’s a big drop. And it likely means that you’ve seen your investment accounts take a significant hit. I know I have.
At this point you might be wondering what you should do. How can you protect yourself against an even bigger downturn? How can you minimize your losses right now so that there’s still money left when the stock market (hopefully) starts going back up?
Well, here’s my advice: Do nothing.
That’s right. You shouldn’t react to the falling stock market. You shouldn’t panic. You shouldn’t sell. You shouldn’t stop investing.
You should do nothing.
That might sound silly, but it’s almost always the right move. Because the truth is that the most successful investors are the ones who stay calm and stick to their plan, even when everyone else around them is freaking out.
You, far more than the market or the economy, are the most important factor in your long-term investment success.
Why Doing Nothing Is the Right Move
Here are four reasons why you shouldn’t change anything about your investment plan right now.
1. We’ve Seen This Before
This isn’t the first time we’ve seen a big swing like this:
- In 2009 the stock market started the year with a 24.6% drop from January to March. It recovered to provide a 29% positive return over the course of the year.
- In May of 2012 the stock market fell 6.7% before providing a 16% return for the year.
- We can even go the other way. After a 13% upswing from March to May of 2008, the stock market ended up losing 37% on the year.
In other words, big movements in either direction are nothing new. They’ve happened hundreds of times before and they will continue to happen as long as the stock market exists.
So the fact that we’re seeing a drop right now shouldn’t be the least bit surprising. We never know when these things are going to happen, but we do know they’re coming.
2. The Stock Market Always Goes Up
It doesn’t go up every day, or every month, or every year. And it certainly doesn’t always go up when you want it to.
But over the long-term, the stock market has always provided a positive return. Always.
3. Stocks Are on Sale!
Assuming that you’re still contributing money to your investment accounts rather than withdrawing money from them (that is, you’re not yet retirement age), you’re going to be buying many more stocks over the course of your lifetime.
So let me ask you this: If you’re out buying a new shirt, would you rather pay more or less for it? That’s a no-brainer, right? Of course you’d rather pay less!
Well, every time the stock market drops it means that stocks are on sale — they’re cheaper than they were just two weeks ago. Every contribution you make now buys MORE stocks than it used to, which means you’re in a better position to take advantage of all the gains coming in the future.
4. Reactions Almost Always Lose
This one’s a bit of a downer, but the sad truth is that we aren’t very good at making active investment decisions.
There’s a phenomenon called the behavior gap, and it shows that individual investors typically get worse returns than the actual investments we put our money into. That is, we buy and sell at the wrong times and those decisions hurt our long-term returns.
And it’s not just regular people that struggle with this. Even professional investors underperform the market as a whole, year after year.
So no matter how strong your urge is to do something, the data says that doing it is more likely to hurt than to help.
What to Do Instead
If you’re still nervous after all of that, and you feel like you have to do something, here’s what I would recommend.
First, review your investment plan and make sure that you’re taking full advantage of the factors that will have the biggest impact on your investment success.
If not, then you may want to consider updating your plan to make sure you’re getting the fundamentals right. Just remember that this is a long-term plan and not a short-term reaction to what’s happening right now.
Once you have a plan, write it down. Spell out exactly how you plan to invest over the next five to 30 years in terms of how much you’ll save, what you’ll invest in, and how you’ll react to big market swings like this one. Make a commitment to this plan and sign the document. Here are some examples you can use to create this plan.
Any time you feel nervous in the future, revisit this document. Use it to remind yourself of your long-term plan, why you chose it, and your commitment to sticking with it.
Doing that won’t guarantee investment success — nothing can — but it will significantly increase your odds of finding it.
Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.