I’m not surprised to see so many people have a knee jerk reaction to the stock market troubles over the last few months. Just a year after hitting all time highs, the markets have lost close to 40% of their value. Many investors are getting out, or at least stopping new contributions.
Here’s why I don’t, and I wouldn’t suggest anyone else do so–
I’m Following My Plan: I don’t invest haphazardly. I have a plan. My plan includes the common buzz words that people use when talking about their plan: index funds, asset allocation, regular contributions, diversification, low expenses, Roth IRA, 403(b). It doesn’t take a lot of time to come up with the plan, but having one is incredibly important.
More important, of course, is following the plan. Just remember, however, that the whole reason you came up with the plan is for times like these–if your plan was sound, just go ahead and follow it. That’s why you have it!
As an aside, in times like these, asset allocation comes into focus as one of the most important parts of your plan. When you’re in your 20s and early 30s, having the vast majority of your money in stocks is fine, but as you get older, making sure you have a reasonable amount in bonds can provide your portfolio with ballast in difficult times.
My Plan is Based on Time Tested Investing Principles: Regular contributions. Asset allocation depending on age. Diversification. Low cost. Using whatever tax advantages I can. They’ve served me well over time (let me be clear: yes, my portfolio is considerably down for the year, but really, the whole market is down considerably for the year. However, since I’ve started investing seriously, every year before this year has been a positive result.) and I believe they’ll continue to serve me well over time, at least in part because they’ve served many, many other investors well over time, but more importantly, because of my personal history with it.
Selling Into a Huge Loss is a Loser’s Game: If I sold my stocks right now and moved into cash or bonds, that’s it; my chances of being part of a stock market recovery–and it has always recovered–are zero. I’ll have locked in my losses forever.
Even Recent History Backs My Position: Does anyone remember the bear market that happened earlier this decade when the dot com bubble burst? Yes, it was tough, and it was painful–this was in 2000. And yet, a few years later, the stock market was higher than when it burst. Let’s not forget: 2007 marked an all time high for the major indices; the market doesn’t just go up and up and up. Even though in the short term the market decline was painful, I’m way better off even now than I was then, and I was even better off a year ago. I fully believe I’ll be even better far before I’m ready to retire.
Yes, there’s been a lot of stock market chaos the last few weeks, but I’m not planning on doing anything that wasn’t in my plan in the first place. I’m here for the long term!