A little reminder that the stock market going down is normal. And if you’re working with a financial planner, YOU might be surprised, but I have been factoring this into clients’ plans for the past 18 months.

Also…as I write this Monday morning, the market is down YTD almost 13%. BUT – This isn’t even as low as the little pothole in December 2018 where the S&P Index dropped to 2416.62. And I would bet a lot of people don’t even think about the market in terms of its actual number, they let the media tell them the percent down (which sounds more sensational). In a real down market, we might be going down for months and I wouldn’t expect to *only* be down 13% – I would expect more like 20%. In 2008, the market went down for 15 straight months for a total of -38%.

But not to worry, if you have a plan in place, you have peace of mind knowing you can ignore the crazy media, be on your way and focus on the coronavirus apocalypse instead.

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 didn’t make anything in four 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 ever 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 four 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? Some companies 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, wherever you happen to be invested.

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 afterward, 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 22+ 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.

Make an appointment with your financial advisor (or get one!)

Most importantly, if you’re feeling uncertain about ANYTHING related to your money, it might be a good time to speak to a financial planner.  Rather than continuing to worry and fret and feel overwhelmed, why not work with someone who can help you make sense of where you’re at and where you want to go?

I don’t have a crystal ball to know exactly what the next few years will bring us. But I can give you new insights into your financial situation and how to protect against any risks you might be worried about. Don’t stick your head in the sand and hope it all works out for the best. Instead, take the time to get yourself in good financial shape now, so that if something does happen, you’ll be ready to roll with it.  Click here to make an appointment for a free consultation right now.