Every investor needs to know that market sell-offs are both inevitable and, in fact, business as usual.
This is not our first rodeo… more like 350th
Since 1900, the market has averaged three declines of at least 5% per calendar year (source: Capital Research and Management Company). In other words: The market has dropped by at least 5% about 350 times since 1900! The mistake so many investors make is that they see their account value declining, and hear doom and gloom from the media and friends. They then assume they should sell and “wait for things to get better.” This is not an advisable course of action: The market has recovered and reached new all-time highs not 90% of the time… but 100% of the time.
Hindsight is always 20/20
Sometimes, we know why the market is selling off. Other times, it is a complete surprise. History has also shown that the reasons for market sell-offs are rarely what the talking heads were predicting. What we know or fear today will rarely be the actual reason for a future market decline.
What should investors do after a big market sell-off?
Know that the recent market decline has nothing to do with what the market will do today, tomorrow, or next month. Many times after steep sell-offs in the market, it goes on to rebound even higher than where it was before.
If you are investing for the long term (like inside your 401k for retirement), the best course of action when you feel scared about the markets is do nothing. Do not panic, do not do something radical like selling out of your investments.
Learn to love a good sale
If your budget allows, a market decline is the best time to INCREASE your contributions to your 401k. Think about it: The market has effectively gone on sale. We know as consumers to look for sales and bargains when we are shopping. Americans would be wealthier if they learned to treat market declines as sales and, if possible, bought a bit more.
Considering that today, the Dow Jones is around 25,000, wouldn’t you want to travel back in time to 2008/2009 and buy a ton of stocks? During the financial crisis, the Dow went below 7,000! Sadly, very few investors were buying when it was at those low levels. Many were even doing exactly the opposite–the worst possible thing: They were selling at those insanely low levels. Doing this likely locked in losses that many investors may have never recovered from. Most other long-term investors who stayed put and ignored the panic were rewarded by their portfolio values, if they were well-diversified. They climbed up to new all-time highs within just a few years.
When in doubt, ask blooom
At blooom, we do our best to communicate these kinds of messages. We worry that there is an entire generation of investors (roughly age 32 and younger) that were likely not investing during the last significant market decline. They have thus only seen the market since 2009 on a fairly robust growth trajectory. We remind our clients that markets never go straight up and that periodic declines are not only inevitable, but actually needed from a risk/reward standpoint.
Since blooom specializes in 401k accounts, it is easy for us to help our clients maintain a long term focus, since their investments are generally for long term goals like retirement. We also remind our clients that included in their monthly subscription fee, they always have access to a blooom advisor if they are feeling scared or considering selling out of their investment portfolio.
Help us help you
Blooom will put together a beautiful, well-diversified portfolio for all clients using the lowest cost funds available within their 401k plan. However, if a client does something rash and sells out when the markets declines, all of the work that blooom has done goes right out the window – and might never return. We suspect that a lot of wealth is squandered by individual investors not from poor investment selection, or high fee funds, but squarely due to bad decisions and bad investor behavior in moments of emotional exuberance or fear. Be careful not to chase over-priced “hot” funds in good markets, and be sure not to bail out of so-called poorly performing funds in bad markets. The old “buy high, sell low” problem – don’t fall for it!
If you would like more information or perspective on this topic – visit blooom’s FAQs regarding market declines.