The Market is Falling. What Should I Do?

March 10, 2020 By Machinist

In a Free-Fall

Falling markets are a normal and expected part of investing.  The proper reaction to an ugly period in the market is to hold.  In fact, the only logical response to a discounted market is an increased motivation to buy more.  Selling may seem right emotionally, but it’s absolutely illogical and wrong.

Explanation

Timing the market is a fool’s errand.  Timing only works if you know where the market is going.  You can’t know where the market will be tomorrow or next month.  But luckily, we can say almost with certainty that the market will be higher ten years from now.

Markets will recover, but you will only benefit if you are invested when they do.  You are not investing for next week.  You are investing for decades, so you’ll realize your best odds of success when you buy and hold for decades.

Investing involves risk.  That means that the value of your stocks can and will drop from time to time.  You should expect to lose several percent twice a year or even more. 

A 10% correction typically occurs every few years.  In fact, there have been 27 corrections (10% or more) and 12 bear markets (20% or more) since World War II.  You know that these corrections will happen, so your master plan shouldn’t change when they do.

Remember, when the market drops you may lose net worth, but you won’t lose money unless you sell.

Exceptions

All bets are off if you are invested in a small number of individual stocks.  I recommend investing in broad-market index funds like VTI or VTSAX, because a very broad portfolio of stocks reduces the risk that your portfolio will be damaged by relatively isolated factors.  If you are invested in one company and the stock drops, then there is no guarantee that it will ever regain its value.  Sometimes a stock never recovers.  That has never happened with any major index fund.

My first job after I graduated from college in 2000 was at Intel.  I was given stock options at the current price on the day I started of $69.69.  Within a month INTC stock had lost half its value as the dot com bubble burst.  It was down as low as $12 within a few months.  Twenty years later, INTC has still not quite recovered.  Meanwhile the major indexes are up by multiples.

Current Events

I am writing this article on March 9, 2020.  In the past two weeks we have seen an epic market correction.  Today alone, the major indexes were down 8% in the biggest one-day point loss in history.  I lost more than $100k of net worth.  That’s a huge hit, but there have been times like this before.  And, as a matter of fact, markets recovered even stronger – every single time.

Coronavirus is going to impact the economy, but we don’t know how much.  So far, the market reaction looks pretty emotional.  It’s the perfect time to remain calm.

To continue reading, please go to the original article here:

https://perpetualmoneymachine.org/market-is-falling-what-to-do/