This week especially I have received questions and have seen countless Facebook posts asking if “now was the time to get out of the stock market”. So I think it’s time we address this oft asked question to hopefully help decrease fear and avoid some of these costly mistakes.
So to start out, the majority of us are and should be long term investors. Meaning, we have a retirement goal set for 10, 20, 30 years into the future. If you are a short term investor, you are either beginning the transition to retiring soon which usually equates to moving more towards bonds or you are gambling.
Market Timing (i.e. Gambling)
I say gambling because as I have said numerous times before, no one, and I mean no one can predict the market. If your plan is to buy stocks when they are “low” and quickly turn these stocks around for a profit when they are “high”, there are few differences to playing roulette at the casino.
And yes, I realize that we all have a friend who got some “insider information” who made a lot of money off of timing the market or buying a certain stock at the right time. I have them as well, heck, I got lucky my first time buying stocks too. I bought around one thousand dollars of a $4 stock of a company which eventually got bought out by a much bigger company. Stockholders were then bought out for $10 a share.
It was awesome! I made great money and thought I somehow knew more than the average investor. I didn’t…I went on to lose more money on countless stocks before I discovered index fund investing.
So what actually happened? I got lucky Just like if you bet $1,000 dollars on red at the roulette table. I won, but there were countless other people who lost that round.
When we try to time the market or guess what’s going to happen, there is always going to be someone who “wins”. Just like there is always someone who wins the lottery. But that doesn’t mean they are skilled at picking lottery tickets. They just got lucky that time. The same holds true with investing.
Should I Pull Out of the Market?
“Okay but that’s picking stocks I have a diversified portfolio. I am talking about pulling my money out of the market during the economic downturn so I don’t lose any more money.” -Everyone
And to that I say that you have not actually lost any money until you pull your money out of the market. That’s when you truly realize a loss. Just because your account shows a $1,000, $100,000 or even $1,000,000 drop, that money isn’t actually “lost” until you sell.
When you sell, now you have locked in that loss. That $100,000 dollars isn’t going to magically come back now. However, if you keep your money invested, that money no matter what is going to hit that bounce when the market begins it’s climb back to record highs again as it has done after every recession, ever.
If you pull your money out of the market, not only are you accepting a $100,000 loss, but you are setting yourself up to potentially miss this bounce back to the top. And missing this rise back to the top is where the real losing occurs.
“I’ll just buy back in once it hits the bottom” – Everyone
That’s gambling. Again, you nor anyone else in the world knows what is going to happen to the market right now, nor ever. So assuming that you can invest and time the market at the bottom and then ride it all the way to the top is an ill advised assumption.
Yes, you’d make a lot of money if you had a magic crystal ball and could see where the market was at the bottom. But if you had that magic crystal ball, you might as well just look up the winning lottery tickets instead, or who’s going to win the Superbowl. It would be a faster access to your wealth.
What Actually Will Happen
In reality, what likely will happen is that you will pull all your money out of the market due to fear of COVID-19 because “this time is different” than the last recession. You’ll sit with a lot of cash in your savings account not working for or against you. Hopefully you’ll still be working and saving, adding this extra money to the amount already in your savings account. Just waiting for your time to pounce.
You’ll watch the market very closely. Each day watching as it fluctuates up and down. Gaining 1,000 points here and losing them again the next day. You’ll watch the market go on a week-long run, gaining traction each day nearing the point that you initially sold at before watching it crash back down again.
Whew, that was close. You almost bought back in. Thankfully you didn’t or you would have lost more money again. Someone was watching your back today.
You’ll tell yourself that you will wait for more consistent improvements, and possibly a cure for the virus altogether before you’ll get back in. You’ll watch the market gain a little traction again, but you won’t be fooled this time. You almost bought back in last time and it crashed even further than before. The market won’t trick you this time.
But what you’ll actually find, is that it didn’t fall this time. It actually continued to rise up past the point that you sold at initially. You’ll tell yourself that it will fall again, just like last time and that’s when you’ll buy. You’ll watch the market rise and rise some more, knowing that this big fall is just on the horizon.
But what you will slowly, and sadly realize is that you missed the rebound altogether. The drop never came…Out of guilt and shame, you still won’t invest because you won’t want to admit to yourself that you missed it.
More time will go by and now the market is nearing record highs again. You’ll read a story online about someone who timed the market perfectly buying at the bottom and becoming a recession millionaire. You’ll get angry, that was supposed to be you.
You’ll finally be ready to invest again. However, now the market is far too high. It could never sustain this pace. It’s never been this high ever. Buying now, would not be smart. I’ll wait until the next crash occurs. That will be your time. You’ll sit back and wait as a record long bull market begins and passes you by. All while your money continues to sit stagnant in your bank account, losing money to inflation the whole way.
The Point of This Story
The point of the story is that our brains are involved in investing in often a very emotional way. It’s difficult to change this concept even when we realize this fact. Investing/money is tied to our health, our family, our shelter, our food, and our overall quality of life. So when we are trying to make decisions about what to do with our money when any of the above are threatened we often react in a sub-optimized way.
All recessions breed fear which further adds to the emotions involved in these very major decisions. Further leading to rash decisions like believing that you can time the market by pulling out and putting back in your money at the correct time.
So if we can somehow take our brains out of our investing, we can hopefully limit this compounding mistake. And I have found that the best way to take my brain out of investing is to have a strict investing plan.
Winning Your Investment Plan
My investment plan: I have talked about my plan in the past but I’ll recap it the best I can. I invest the exact same set amount (sometimes more, never less) of money from every paycheck into the exact same index fund. Period. That’s it, that’s the whole plan. Sometimes the location of the index fund varies whether it’s my brokerage account, IRA, or HSA, but it’s always the same index fund.
Quite frankly, my plan is outright boring. But successful plans are boring. You want to know what isn’t boring, Las Vegas. And guess what Las Vegas is primarily known for…
My plan is strict and it’s routine. Two things that breed good habits. If you don’t trust yourself, you can automate this process having the money taken from your checking account and invested for you in set time periods. However, for me, there is something therapeutic about doing it manually and watching the funds move. It makes me appreciate the work I am doing I suppose.
It’s a winning strategy. There is no gambling, no timing the market, no playing games, and definitely no emotions. It’s practically robotic. I invest when the market is at all time highs and I invest when the market is at all time lows. I have not once missed a rebound back to the top.
I admit, I try to save more/make more during market drops to try and invest a few extra dollars but I never miss investing my minimum weekly amount.
Conclusion
Don’ts:
- Don’t try to time the market
- Don’t pull your money out of the market
- Don’t lose control of your emotions
- Don’t fear
Do’s
- Do invest every paycheck in a routine and strategic manner
- Do stick with your investing plan through the good and more importantly the bad
- Do try to keep your emotions out of your investing
- Do enjoy the ride to retirement/financial Independence
These are unique times we are living in right now and fear is normal and common, but let’s all try to keep it separate from our investing. The best thing we can do is to continue our plans and likely we will be one of the success stories. It is true that often wealth is built following recessions but not if we continue to try and gamble with our retirements.
If someone you know is fearful about the market and considering something drastic , I ask that you please share this article with them. Or if they need more advice on Financial Crisis Plans or want access to my Complete Guide: To Handling a Market Crash, follow the attached links.
As always, comment below with any questions or concerns. If you have any specific questions, feel free to email me at fiscaltherapist1@gmail.com
