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Worried About the Stock Market and Your Retirement Savings? Read This.
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In the last few days, a number of readers have written to The Simple Dollar regarding the recent downturn in the stock market. Here are a few of those notes, starting with one from Dave:
45 years old, aiming to retire at 62. I have been in the aggressive portfolio in my 401(k) since signing on back in 1998 and contributed regularly. I didn’t pay attention to it during 2000-2002 or in 2008 but now I pay attention and these recent drops are killing me. How bad am I hurt if I move things to a less crazy investment?
and one from Charlie:
61, was thinking about retiring next year but stock market is ripping my retirement apart! Help!
and one from Ally:
I’m started to freak out about the stock market as I see my investments in my Vanguard index funds plummeting every day. I know I need to wait it out as I’m only 34 but it’s really starting to panic me. Intellectually, I know to stay put and watch the gains as the market “recovers” but I worry that I may actually need some of that money before it goes back up and start operating from a perspective of scarcity vs. abundance (even though I have lived by the rule of thumb that if I think I’ll need it in 10 years, put in high interest savings instead). All of a sudden I start imagining scenarios where I’ll need it sooner and put my finances in jeopardy.Please help talk me off the ledge!
We’re all seeing the same thing. Depending on what numbers you’re using, over the last two and a half months, the stock market has lost between 10% and 15% of its value. That means, of course, that if you have a large portion of your retirement savings invested in the stock market, you’ve seen a similar drop in the value of your retirement savings.
Part of what has made this dip so stark is that it comes at the end of a very long positive run for the stock market, dating back almost ten years. Ten years of almost constant growth in the value of the stock market is a historical run, one likely only possible because of the enormous dip of 2008 which gave the stock market a very low point to start from.
As you can see, those factors have caused a lot of people to panic and consider changing their retirement investments. My advice? Well… in honest truth, I have not looked at my old 403(b) or my Roth IRA in the last three months. At all. Even if I did look, I wouldn’t change a thing.
Here’s how my thinking works on all of this.
We Look at the Short Term When We Should Look at the Long Term – and That’s a Mistake
The stock market is an awful short-term investment. It can lose a significant percentage of its value in just a few days, often seemingly without warning to the average investor. Even over the course of a year or two, you might have individual years where it goes up 20% and other years where it goes down 40%. It’s really hard to plan around that.
If you are going to need your money back in less than 10 years, you probably shouldn’t be invested in the stock market.
The thing is, most of us are more than 10 years from retirement. We’re invested in stocks as a long term investment. Even people in retirement should have some portion of their retirement savings in the stock market because there’s a good chance that they’re going to be around more than 10 more years and they should be investing for that timeframe. At that point – a timeline of more than a decade – you have to start looking at long-term returns and averages rather than individual years, because individual years aren’t really all that meaningful when you’re looking at time periods beyond 10 years.
I like to think of the stock market as a simple gambling game. It’s a model that helps me make sense of it.
Imagine that there’s a game where there are nine red balls and one black ball that randomly come out of a tumbler, like drawing lottery numbers. If the black ball comes out, you lose 40% of your bet. If any of the nine red balls come out, you win 10% of your bet. However, you have to bet your whole retirement savings. What do you do?
Well, for me, it depends on how many times I can bet. If I can only bet once, then it’s probably not a worthwhile risk. I could lose 40% of my bet right away! Not good! However, if I can just stand there and keep betting more than 10 times, I’m going to do it and just keep letting my bet ride over and over again. Nine times out of 10, I win 10% of my bet, which far more than makes up for the 40% I lose one time out of 10.
If I think about nothing but that first ball, I’m probably not going to bet and I’m going to want to take my money off of the table. It’s only when I think about the fact that I’m going to be around for 30 or so balls to come out of the tumbler that I begin to feel good about it. (In fact, I probably don’t even pay much attention at all to the individual balls coming out of the tumbler, because it really doesn’t matter to me.)
The thing is, it’s pretty scary when the black ball comes out of the tumbler. Suddenly, a large chunk of our money is gone, and it’s really tempting to take your bet and run away.
That’s silly, though. It’s like quitting a game of basketball because you missed your first shot. If you were only going to care about your first shot – or your most recent shot – you wouldn’t bother to play that game at all. If a basketball player quit when they miss a few shots in a row, no one would ever play basketball. At the same time, no one would bet their entire life savings on one single shot of the basketball.
For most people, the stock market is a very long term investment – more than 10 years – and making decisions on that investment based on the last month or two is a grave mistake. It’s like firing Michael Jordan because he missed 10 shots in the game last night and his team lost.
Instead, look at the last 10 years of stock market returns when making your decision, because that’s the kind of time frame you care about. Don’t look at this chart when making financial decisions; look at this one instead. In other words, look at the long term, not the short term, because if you’re investing for more than 10 years down the road, the short term is meaningless.
It is normal to feel a bit nervous about retirement savings. Regardless of how you invest in the stock market, you are sure to encounter the normal stock market worries. Average stock market returns are around 7%, but that is assuming a diversified portfolio and long-term investments greater than 10 years. All that aside, if you are looking at the long-term and are trying to figure out how to establish some retirement savings without heavy fees, give Robinhood a look. The mobile and online investing platform offers free trading on stocks, options, ETF and cryptocurrency.
While it doesn’t offer specific retirement accounts, mutual funds, or bonds, you can still use Robinhood as a long term savings account for retirement.
With $0 minimum account balances, you can start investing at any time as long as you have enough money to buy the first investment. Then just kick back and let your investments do their work and be as active or inactive as you please. The mobile app makes trading and keeping up with your investments a breeze.
Now, if you want to borrow money from Robinhood to trade on a margin or gain access to market research, Robinhood Gold is available for a fee of $5 per month. However, If you use more than $1,000 of margin, you’ll pay 5% yearly interest on the amount you use above $1,000. Accounts for margin trading are also required to be funded at a minimum of $2,000 per FINRA guidelines
Robinhood also offers a cash management account. With the fee-free trading and fractional share offerings with Robinhood, you can quickly build a low cost well-diversified portfolio.
We Listen Too Much to Current News and Media – and That’s a Mistake
The United States currently has three different major 24 hour news channels available on most cable providers, two devoted financial television channels available on many cable providers, and countless journalists and prognosticators trying to make a name for themselves on the internet, particularly on social media.
All of that has to be filled with some kind of content, and it’s usually whatever content that they can find that will attract eyeballs.
What attracts eyeballs? Fear. It’s why disasters get breathless coverage. It’s why the efforts of Washington are constantly painted to be doom and gloom and disastrous and even evil. That kind of coverage is constant, too – it’s around the clock on news networks and social media.
The same exact thing is true with the stock market. A 10% drop in the stock market really isn’t anything unusual – it happens every few years at least – but to hear the news networks and social media and the prognosticators and the talking heads tell it, it’s apocalypse out there. The sky is literally falling, everyone is going broke, people are jumping out of buildings on Wall Street.
It’s being reported as something unique and something disastrous because that’s what attracts eyeballs, and eyeballs are what makes the news networks and the reporters on social media lots of money.
There’s so much time to kill and space to fill that the same things get reported on over and over and over again until the urgency of the supposed disaster seems almost overwhelming, driving people to emotional extremes.
My belief is that social media and cable news are not very useful for understanding the world. They present current events from the singular angle that makes them the most money and that’s through pushing emotional buttons, mostly fear. That emotional button drives people to poor decisions, and it’s abundantly clear when it comes to finances.
In other words, social media and other news sources tend to encourage people to react emotionally to things rather than rationally. Investing is a rational game rather than an emotional one; if you make emotion-driven investment decisions, you’re going to lose out. Thus, at least in terms of investment decisions on the scale of the individual investor saving for retirement, you should pay no attention to the 24 hour news cycle. It nudges you toward emotional decisions rather than rational ones.
We Put Our Faith in Salespeople – and That’s a Mistake
Another problem is that many of the people out there talking about the stock market are effectively salespeople. They want people to buy some product they’re selling, whether it’s an account with their brokerage, their services as an investment manager, or an investment sold by their company.
In general, brokerages make money when you do something with your investments, whether it’s buying shares or selling shares or something like that. They want you to take action regarding your investments.
So, if the stock market is doing something, they have a financial interest in making it sound like a great reason to make a move. If you tune into CNBC or Fox Business lately, all of the chatter is about moving your investment money around to avoid getting hit hard by the stock market slide. Most of that talk is coming from guests who work for brokerages, who make money when you move your investments around.
Always ask yourself where your investment suggestions are coming from and why they’re being given. Yes, that includes me. I write because I believe in what I’m saying, and I make money by having more readers, not by convincing anyone to take any action. The more readers I have, the more advertisement views the site gets, and the more money everyone involved makes. Thus, it is in my best interest to do my best to give realistic advice and thoughts.
With the talking heads on financial television, the goal of the host is to keep you watching, while the goal of the guest is to entertain you and, along the way, try to nudge you to their point of view because the guest makes money by being entertaining (from the network) and makes money by having more customers buying and selling investments (from their own business).
In other words, take the words of investment advisors on financial networks with a grain of salt. Most investment advisors will do right by you in a one-on-one situation, but that’s not their goal when they’re on television. On television, they’re there to entertain, to get the name of their brokerage out there, and to nudge people to take action on their investments whether it’s in their best interest or not.
Together, these three issues – along with natural human risk aversion – cause people to get extremely jittery when the stock market grumbles. Every time a 10% drop happens, I get emails and messages from readers with sentiments like those expressed by Dave and Charles and Ally.
While I can’t offer a perfect solution for everyone, here are five practical steps you can take to help quell the desire to make abrupt retirement moves when the stock market drops.
For starters, just stop paying any attention to the day to day financial news. Don’t watch CNBC. Don’t watch Fox Business. Don’t read financial news. Leave that to people who do this for a living and might change their investments every 15 minutes to try to score a short-term buck. That’s not the situation you’re in and thus most of the day to day financial news is irrelevant. It provides you with information that isn’t relevant to your decisions and emotional twists designed to nudge you to make a mistake. Just stop watching – it’s not providing value to you.
While you’re at it, stop paying much attention to the 24 hour news cycle. Almost all of it is driven to trigger emotions and garner eyeballs, not to actually inform you in any meaningful way. Learn from well-researched books and well-referenced articles, not from “hot takes” and high pressure combative guest appearances.
If you’re taking financial advice from someone, know who that person is, where they’re coming from, and whether they’re trying to sell you something. Who is this person who is encouraging me to sell? Why are they saying this? What do they have to gain from it? If you can clearly see how they gain from your moves, take their advice with a grain of salt.
Don’t look at your account balance except on a regular infrequent pattern just to make sure everything’s working fine. Looking at your balance frequently makes you start to overinflate the importance of day to day changes compared to long term changes, and it’s the long-term changes you care about. We often buy into the idea that we should be worried if our investments have gone down the last few times we’ve looked at them.
Know what your plan is for saving for retirement and stick to it regardless of the “news.” A good plan is based on principles, and for retirement, that means staying put through thick and thin and only making changes in specific situations that you considered outside of the news cycle. Stick to that plan and don’t let short-term changes and emotional responses change that plan.
In short, stick to the plan and stop listening to people who are just adding noise to the mix.