Do Nothing.
I guess I will expand a little bit more. But the above is the best advice you are going to find on the internet, I promise you that. And with far less words, but if you insist on reading on we can break down this sound advice further.
I previously had another article planned for this week, but in light of this week’s stock market drop/”dooms day” I pivoted to an article that I have been wanting to write for awhile now.
Market Fear
For reference, on Monday there was a large dip in the the stock market. The Dow Jones which is an index that tracks the top, publicly-owned companies dropped over 1,000 points. Making it the third largest drop in market history. This was then followed up by a Tuesday drop of 880 points making the total drop about 8.4%. This was accompanied by a 7.6% drop by the S&P 500, and 8.6% drop in the Nasdaq, both indexes that are used to track the United States total market.
The drop is being associated with the Coronavirus which took the chaos that occurs normally after a market drop to an entire other level.
As a thought experiment today, I googled “stock market” to see what fun headlines the mainstream media had for everyone to help calm them down after a crash like this.
As you see, this stock market dip is nothing to worry about. We only have a “bloodbath”, people falling off a cliff, a high speed car crash, and hazmat suits on our hands…Everything should be just fine according to mainstream news.
What this kind of media does is provoke fear. It scares the people who aren’t in the stock market yet to stay out, and it scares the people who are invested in the stock market to get out. So what starts to happen is that due to this fear, people start leaving the market and attempting to time (guess), when the market is going to rebound.
This habit is dangerous financially because what it leads to is opportunity cost and missed return on investment. For example, in Dec 2018, a separate stock market crash occurred where that quarter, the Dow dropped 11.8%, the S&P 500 13.97%, and the Nasdaq 17.5%. Here were some of the headlines, it may look familiar.
Anytime a stock market drop is associated with the Great Depression, that can’t be good, right?
And even before this crash, we already assumed 2018 would be the peak of the market. It couldn’t possibly get any better than this, right? This quick crash is likely the first step towards full market meltdown. I should pull my money out now, because this is likely the start of a long bear market, right?
Well had you pulled your money out of the market following this drop because you were scared and fearful of the market dropping further. You would have missed out on the quick rebound back to it’s starting point in the next few months. Plus the returns on the new all time index highs that occurred during 2019.
If you pulled $100,000 out that you had previously invested in the market following this drop, you would have missed out on nearly a 30% return in 2019. Or in other words over $30,000 of passive income. Plus the gains that occurred during the first month and a half. Just think if you had $1,000,000 in the market…
The Market is Too High
Alright, so we missed out on massive gains in 2019. That’s unfortunate, clearly we were wrong about this stock market crash. But now, the market is wayyy too high to get back in to it. We need to wait for another crash before we can invest again. Do you see where the problem is?
When we try to time the market, we end up just keeping our cash on the sidelines, which means it isn’t working for you and we miss out on all the gains. Yes, if we could perfectly time the market we could make more money. I get this. But I also get that this is impossible, and the odds are that you are going to guess wrong and miss out on any gains at all.
Thousands of people try to predict the market and thousands of people are wrong about it. Just look at the above news article from CNN business, a “expert” in the field. They offer up a warning (guess) that 2018 would be the peak of the market. And they were oh so very wrong with this guess.
Yes, if enough people guess, someone will eventually be right. But that doesn’t make them a stock market guru, they just got lucky. And you might not be as lucky as them or have as much margin for error.
So What Should I Do When the Market Crashes?
Nothing. That was a test, you failed. When the market falls, you should invest. When the market rises, you invest. When the market stays the same, you invest. Whatever it is that the market is doing, you shouldn’t care. Your strategy should be the exact same. We are investing for the long term, so all we care about is keeping our money in the market.
I know that this is scary watching your money drop when a market fall happens. So the best strategy is to not watch it at all and continue your plan. I know it’s hard. I started investing in 2018. My return on investment that year was -10.25%. It sucked, a lot.
But guess what, I didn’t change my plan and 2019 was awesome. I made even more money than I ever thought possible for doing absolutely nothing besides letting my money sit in the Vanguard Total Stock Market Index (VTSAX). I finally understood how amazing compound interest was.
Since the beginning of the S&P 500, the average annual return has been about 10%. Conservatively, 7% is a safe assumption given inflation. Yes, there were plenty of years with negative returns but plenty more years of larger positive returns. Since the inception of VTSAX in 2000, the cumulative total return has been 276.04%
The stock market has always gone up.
If the stock market ever does crash and doesn’t return, then we have far bigger concerns than money. Meaning it would take a colossal disaster for this to occur, the kind of disaster that would have us more worried about survival than our investments. Now this, this is fear.
One Exception to the Rule
So I do have one slight exception that I personally follow in regards to my “do nothing” plan. And that’s that I typically try to invest more when the market dips. I want to buy these discounts. So during these small down turns, I try to spend less, save more, and invest this difference so I can get even more money in the market.
Or if I have a separate fund started, I’ll begin to pull from that. For example, I have started a “buy an investment house” fund in which I keep my money in a high yield savings account. I will start to pull from this fund to continue putting as much money in the market as I can during these dips.
I don’t use it all or put it all in at once, but I start to add a little more from this fund to my normal weekly investments to continue to ride the discount all the way to the bottom, and assumingly all the way back up to the top some time in the future. Once the market returns to its normal highs, I return to my normal investing plan but I begin to allocate more to my rental property fund once again.
Conclusion
When the stock market falls, despite what the “experts” say or report, the best strategy is to do nothing. Stick with your plan and if you can scrap together some extra cash, buy even more on discount.
I get that it’s scary and the media doesn’t make the fear any easier. So just ignore it. Get your mind set in place now, so when a real crash does happen. You have the mental fortitude to take it head on and set yourself up for successful retirement in the future.
If you want to read more about this, I suggest visiting Jim Collins Stock Series as he does an amazing job further breaking down my above points.
As always, feel free to comment below with your thoughts on the recent crash and how you deal with it!
Or if you have specific questions, feel free to email me directly at fiscaltherapist1@gmail.com
