The latest market correction was but a month ago. I contemplated writing this then but the internets were awash with articles and tweets about the correction. Some proclaimed their prophecies about the end of the world come true while others reminded us that we should just stay the course.
Now that the panic has settled down, and the world is definitely not on the way to ending, it’s time to ruminate.
Markets Go Up And They Go Down
Repeat that as many times as you like. The only difference is that the time horizon changes. As a friend put it, “this is how the market is supposed to operate”.
Over the long run, markets always go up. Period. So if you’re in it for the long haul – which is what you should be doing for the core part of your portfolio – then you shouldn’t care.
Yes, it hurts when they go down but don’t dwell on it and focus on other aspects of your life.
I just heard an episode of the Hidden Brain podcast on information aversion aka the ‘ostrich effect’. It’s from 2017, but worth a listen. Information aversion is essentially the act of ignoring any ‘negative’ information that may cause harm to us. No one wants to see or hear bad news, sometimes to our detriment. Information is information – always useful, and the problem doesn’t go away just because we choose not to absorb it.
In the episode, they mention how folks tend to constantly watch their portfolio when the markets are going up but reduce the frequency drastically when the markets are going down or crashing.
The way I see it – if not watching the news or the financial markets helps you to not panic and not sell out of your investments then, by all means, do it. I know I do the same – I watch and am aware but do not react.
How’s Your Appetite For Risk?
When markets are falling, it is a great time to assess your appetite for risk. Is it still the same as you thought it was or should you consider making some changes? Again, this shouldn’t be an excuse for you dump all your investments and leave it all in cash. That would be the dumbest thing to do, and you’re too smart for that, right?
If you’re able to grin and bear it then great – you made the right call, and you should stick to your asset allocation.
If you find yourself panicking and voraciously consuming “advice” on the web, then it’s time to dial it down and maybe invest more conservatively. I’m not one to opt for financial planners (yet), but this is one case where they’re worth their weight in gold. If you have one, or even if you don’t, find one and go and talk to him/her. Let them talk (beat) some sense into you.
Remember, you haven’t lost anything until you sell.
Have Your Circumstances Changed?
You may find that it’s been a while since you last updated your asset allocation and evaluated your appetite for risk. Are your kids closer to college age, or has your employment situation changed? Maybe you have more (or less) passive income coming in?
All of us are at different stages in life, with different goals and appetites for risk. Re-evaluate where you are and then make changes with a calm and collected mind.
If you will need any money over the next 3-4 years that’s currently tied up in investments, then move those to cash or a short-term bond fund after markets stabilize. Again, sell the winners first, as much as possible. Lots of retirees (early or otherwise) keep a few years’ expenses in cash for this very reason. It lets then sleep peacefully at night irrespective of the market’s gyrations.
Great Opportunity To Buy & Diversify
As is obvious to those who’re not (or are done) panicking, this is a great buying and rebalancing opportunity. Sell the winners and buy more of the losers. If you had spare cash lying around, go ahead and buy some more – this is the best time to invest as almost everything is on “sale”.
We ended up being very lucky in that I’d just placed a couple of buy limit orders in end January. These were our Roth IRA contributions and were sitting in the money market waiting to be invested. The limits were just a few hundred basis points below the bid-ask spread and I didn’t expect it to trigger. Then the market corrected and both orders were filled in the same day. Talk about getting lucky! Of course, the amounts were too small ($5,500 each) to have an impact on the overall return but it felt good nonetheless!
You Cannot Predict The Market
Markets respond quickly, and it is impossible for you – or anyone else – to get the timing right. You may get lucky now and then, but it’s going to be rare. Trying to predict the market is great when you’re investing with ‘play’ money but not with your retirement funds. You need to be able to get out at the right time, and then get back in at the right time as well. Chances of you getting both right is zero. Not 0.0001 %, just ZERO.
Markets gyrate. You cannot predict consistently. Suck it up. Think long term.