After following a stock market that’s been on a pretty steady upward climb since late March 2018 — and has recently set some all-time highs — investors have watched the Dow Jones Industrial Average plunge more than 1200 points over the last two days. That’s around a 5% drop in basically the blink of an eye.
This volatility has seen a rash of people dumping stocks and heading for the hills as investors on both Wall Street and Main Street deal with one of the biggest declines of the year.
Could more losses be in store or do things pick up from here?
Surprise — what’s next for the stock market doesn’t really matter!
As the volatility keeps investors on their toes, I have some advice for panicky investors worried about a market that seems to have suddenly reversed from the all-time highs recent weeks.
Here’s a reality check: We’ve been on an epic bull market tear since the lows of the recession in 2009. That’s nearly a decade of gains for the stock market! Things are bound to get a little hairy from time to time and that’s actually a good thing for most investors.
Right now, we’re in a situation that has people wondering if the the past couple of ugly days are a sign of more bad things to come. And they wonder if they should sell before it all comes crashing down.
While some skepticism based on the past experience of stock values cratering during the Great Recession is healthy, abject fear is not.
The reality is the stock market is so highly valued that we are going to have a correction, which means values will drop 10%. It’s also likely we’ll have a bear market at some point, which means we’ll be 20% down or more.
So should you go sell everything today? Absolutely not.
If you’re putting in money through a retirement plan at work and have a lengthy horizon until you have to use that money, just keep going along paycheck by paycheck with your investing. That’s called dollar cost averaging, and it can make you a fortune over time.
I’m not selling anything from my portfolio. I’ll continue to dollar cost average as I always do. That’s because I don’t need any of the money for the foreseeable future.
But if you do, and if you need it in next three years or so, it’s a good idea to re-balance before times get tough and take some money out of the game — that’s true especially now that more interest rate hikes are likely to come and create better opportunities for savers with higher rates on “safe” options like CDs and money-market accounts.
If you don’t need the money for seven or more years, then just ignore this volatility — even if it turns into a full-blown correction or bear market — and keep on investing. Because you can’t time the market. But it is time in the market that makes you money in the long haul.
So, to recap: For money that you must use in the next few years, there’s a risk. On the other hand, if you have money that is for a far future use, ignore all the headlines. The key is to be in the game, because wealth flows to owners over time.
For more guidance, see my investment guide.