Do's and Don'ts: Thriving Long-term from a Market Correction
Over time, that stock market has proven to be a fantastic investment for accumulating wealth. From January 1, 2008 to January 1 2018 the S&P 500 had an annualized return of 9.58% including dividend reinvestment (https://dqydj.com/sp-500-return-calculator/ ). Why is that time important? It’s important because that time frame includes the “Great Recession” when the S&P 500 lost 38% in one year. However, as an investor going through the “Great Recession,” if you sat on your hands and did nothing, you were rewarded handsomely for your commitment to your plan. On February 5th 2018, the market once again reminded us that it doesn’t go up every day. The DOW dropped 1,175 points that day. Important side note, measuring rises and falls in points is less relative than measuring it in percentages. Additionally, most advisors would agree the DOW Jones Industrial Average Index with its 30 companies is no longer the best barometer of the market. None the less, the market had a significant sell o?, but let’s keep things in perspective. The stock market declining by 10% or more is termed a “correction” and is normal. History shows they occur every 1 to 2 years. Having a market rise every day without resetting itself is not normal. As long-term investors we look forward to these moments and identify them for what they are: opportunities. They are opportunities for our dividends being reinvested and opportunities for our regular monthly funding. If we are willing to turno? the news media, we’ll see the economy most of the time is the same as it was prior to the correction and the quality investments that we own are the same too, except they just o?ered themselves to us for repurchase at a discounted price. In my mind, that’s something to get excited about.
Here are my DO’s and Don'ts for thriving long-term from a market correction
DO: Review your account with your advisor annually. Your allocation, which is the percentage of stocks, fixed income,precious metals and cash you own in your investment account can be back tested over the previous bear market or recession. Past performance is not a guarantee of future performance, it will give you an idea of the temporary loss you may experience through market downturns. If you are uneasy with the results, the time to adjust is now.
Don’t: Attempt to time the market peak by selling out stocks in anticipation of a correction. As long-term investors we do not incur capital gains or fees to avoid short term volatility. Pull-backs in the market are normal and allow our dividends and interest to buy more shares at a reduced price. The S&P 500 hit all-time highs every month in 2017. Trust your investment plan to work for you through good times and bad. Remember: stocks tend to fall faster than they go up, historically stocks go up more than they go down. As a long-term investor, the odds are in your favor.
DO: Build an emergency fund that is equal to 3 to 6 months of income. This emergency fund will give you access to cash and help you avoid panicking when normal downturns occur.
Don’t: Avoid making investment decisions after listening to news media. The news media’s goal is to grab your attention. That’s why most of the evening news is negative. Our brains are hardwired to identify threats. Every DALBAR study ever performed tells us as investors our human emotion is our worst enemy. Don’t allow yourself to fall prey to sensationalized news reports.
DO: Become a student of history. Where was the market 10 years ago? Where was it 30 years ago? Are declines in the stock market something to fear or opportunities that prepared long-term investors profit from?