Guess what…every 6-7 years, the stock market goes down; it’s called a market correction. But you don’t need to freak out or assume that we’re having an economic apocalypse! Once you understand what you can do to weather the storm, you’ll know what to do to take control of your money.
Normal economic cycles
Stock market corrections are a normal part of economic cycles. Last time this happened, it was preceded by a horrific mortgage crisis in 2007-08, but the actual lowest point in the stock market was January 2009. And it took until December 2010, about 24 months, for people’s account balances to come back up.
But here’s the problem: people freak out and move all of their money out of their stock market-based mutual funds. That’s not awful if they move them into bond funds, because when the stock market is doing poorly, bond mutual funds generally do well (and vice versa).
But then there are some people who have kept all of their money in CASH since 2008, and haven’t made anything in 4 years—a period of double-digit growth for the stock market.
OR…they just left their money in bond funds, which started losing traction as soon as the stock market started doing well again. So these people missed out too.
The real problem? These people got scared and pulled out, but never went back into the stock market—because they didn’t have emotion-free, logical decision criteria in place to go back in. And then they forgot to look at it (or avoided looking at it) ever again, because there wasn’t anything scary enough to motivate them (until I came along and said they wouldn’t never be able to retire unless they weathered the stock market cycles for the next 30 years).
Cyclical stock market corrections
You should think of economic cycles the way we think of other seasonal things—a farmer doesn’t get pissed off and quit farming because he can’t get his tomatoes in December; he just makes a plan to access his tomatoes when they naturally grow (when would that be? I suck at farming). And if he needs to have tomatoes in December, he creates a plan well in advance (hot house, canning) so he doesn’t leave it to chance.
The same with economic cycles. Here are 4 things to help you reframe the next market correction:
Don’t get emotional. Do you cry and scream “Apocalypse!” when the weather doesn’t cooperate with your plans? No. You say (if you’re in Seattle), “Oh well, I’m just going to do what I was going to do anyway, and it might not be in the IDEAL conditions, but that’s okay, because there will be other opportunities in the future.”
Pull money for next two years. If you need money for something specific, like living expenses in retirement, you should have two years of your expenses parked in cash. Or, if you’re not retired, if you know you’re going to need money for a new roof, vacation, home down payment, etc., THIS MONEY SHOULD BE IN CASH. You should be able to access the money you need in the short term without being subject to market volatility of any kind (stock market AND bond market).
People hate this rule because it means you might be missing out on potential stock market gains. The good news is, you’re also missing out on potential market losses which could screw up your plans. Right now, clients hate this rule when I tell it to them. When the stock market corrects, they will LOVE this rule again.
Stay invested with long term money. If you don’t need the money for about 7 years, stay fully invested in the stock market. Even if the market goes down, you’re not losing money unless you move OUT of your mutual funds into cash or bonds…so if you’re in the stock market when it goes down (which I plan to be), just stay there.
Amazon, Microsoft, Starbucks, Google, Apple and all of the rest of the companies that make up the stock market do not look at a market correction and say, “Oops! We better shut down our companies forever and go home!” No. They will continue to create and offer products and services that you want to buy. And stock prices will recover in 18-24 months.
Check allocation now. Guess what? Large companies like Amazon are already experiencing a lower stock price since the start of the year. But you didn’t start to panic, did you? You probably didn’t even notice. That’s good. Ignore the media and stay the course.
Not every kind of stock is up at the same time, so it pays to diversify across as many categories of stock as you are able—large companies, mid-size and small companies and international companies of all sizes. Most 401ks have options in all of these categories, and if you have personal investments like Traditional or Roth IRAs, you have the universe of options to choose from, where ever you happened to be invested. And unless you’re within 7 years to retirement, I wouldn’t worry about keeping bond funds in your allocation.
Don’t try to time the market
It would be awesome if we all knew exactly when the stock market is going down, and then afterwards, exactly when the market hit bottom. If we all knew that, we could make a pile of money by moving out at the top of the market, and then investing back at the bottom (buy low, sell high). But after 15+ years of working as a financial planner, I know it’s a rare person who can make that prediction. I’ve never met anyone like that, but I have heard tons of urban legends, about the friend of a friend who was working with a broker who moved his clients out just in time.
But even if I was still getting paid to manage assets, I would STILL keep my clients fully invested, because I am humble enough to know that I DON’T KNOW what will trigger the stock market correction, and I’d rather have clients ride the roller coaster than miss out because I moved them out too early or too late. Because for me, investing isn’t an emotional issue…and it shouldn’t be for you either.