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What to Do When the Stock Market is Turbulent

This year, so far, hasn’t been pretty for the stock market. It has experienced turbulence, to put it mildly.

Actually, turbulence implies ups and downs, which isn’t exactly an accurate description of the past six months. There have been a lot more downs than ups.

Raise your hand if you’ve had a look at your portfolio in 2022 and what you saw caused heart palpitations – and not the kind you’d get from a trashy bodice-ripper novel, but the ones that make you want to reach for a paper bag to stave off hyperventilation.

If your hand is up you’re in good company.

In May I welcomed a new cohort of students in my Investing Made Simple course, and now that they are most of the way through the course and they have an understanding of how the markets work, they are concerned about what they’re seeing.

Even students who completed the course in previous years are reaching out to me to ask, “What’s with the markets? What should I do? Is it foolish to keep putting money into a market that keeps going down?”

These are all great questions.

Nobody has a crystal ball to tell us what the next six months or even six years will hold, but I find it helpful to go back to the fundamentals in times of uncertainty.

That’s what this post is about – looking at the big picture and putting things into perspective.

Three of my students asked great questions in a recent group coaching session. I’ll use their Q’s as the launching point for my discussion on what to do when the stock market goes through a major downturn.

Q1: Should I hold onto my cash for now until the market turns around?

When the market goes through a downturn, it can be disheartening to purchase funds one month only to see them go down in value the next month. It’s hard enough when it happens one or two consecutive months, but six? That can start to play with your head.

Will the market ever bounce back? Are we fools to keep putting money into the markets right now?

We look at the markets and we obsess. The more we obsess, the more we look at the markets in a never-ending cycle of stress.

In his blog post, The Worst 6 Months Ever for Financial Markets, Ben Carlson takes a look at the performance of the U.S. stock market from January to June of 2022. Here’s what he found:

The period ending June 30, 2022 ranks in the worst 3% of all 6 month returns since 1926.

The only 6 month performance numbers that were worse than what we just lived through occurred during the Great Depression, 1937 crash, WWII, 1970s bear market, bursting of the dot-com bubble and 2008 crash.

That’s a who’s who of terrible, no good returns.

Adding insult to injury, bonds had one of their worst 6 month runs as well.

Not very encouraging, is it? You can be forgiven for thinking that this is a terrible time to put your money in the markets.

But here’s the thing: Investing in the stock market isn’t a wealth-building strategy measured in months, at least not if you use an evidence-based approach. It’s a strategy that requires time to yield results.

In other words, if you’re going to invest in the stock market and tip the odds of doing well in your favour, you need to take a long-term approach.

Carlson makes the point this way:

I hate to be that guy, but 6 months is also a short period of time in the grand scheme of things. If 6 months is going to make or break your investment plan, it wasn’t a very good plan to begin with.

Blunt, but true.

Then there’s this consideration: No one knows when the markets will climb back up. When they do, though, you want your money in there to benefit from the climb up.

Since research tells us that the bulk of the markets’ returns are due to a limited number of days, even over a period of years, you could (and probably will) hurt your returns by trying to time the market.

 

Q2: Will it ever go back up?

Carlson addresses the uncertainty of the markets this way:

I don’t know what the next 6 months or even 6 years will bring in the financial markets.

There could be more pain ahead or markets that go nowhere or who knows what else.

There’s no such thing as ‘always’ or ‘never’ when it comes to the markets but I feel strongly that investing in the midst of awful stock and bond returns will be a good idea over the long run.

That’s because the market is currently on sale.

Sure, you might feel like the way to make money in the markets is to ride the wave up, but as Carlson points out, “… true wealth is built during bear markets, especially when you’re young.”

Remember the saying, “Buy low, sell high?” That presupposes that there are low periods. No one wants them, and yet they present a tremendous opportunity to buy the market when it’s on sale.

The hard losses are part of the cycle of getting great long-term returns. It’s part of the equation.

Right now, we are in the midst of a major buying opportunity, which is why Carlson ends by saying, “I for one am excited to be putting new money to work at much lower prices.”

Q3. Is the stock market a good place for my money given everything that’s happening?

One of my students has never invested in the stock market. This is her introduction to it and she’s leery. She looks around and she’s not certain that putting money into the market as a whole is a good idea.

⚠️ At the time of writing, Russia is invading Ukraine which is causing havoc worldwide in the form of food shortages and the mass displacement of families, to name just two resulting problems from the occupation (not to mention the tragic and staggering loss of life in Ukraine).

⚠️ Climate change is reaching a crisis point, with environmental disasters – forest fires, floods, heat domes, tornadoes, etc – appearing to be the norm now, not the exception.

Are we just perpetuating these issues if we put our money into the market as a whole, supporting what appears to be “business as usual”? Wouldn’t we be better off selecting individual companies who are working to solve the climate crisis or avoid the markets altogether, asks my student?

I get the concern. It’s easy to look around at the global issues and to become cynical.

But there are two major concerns with what she proposes.

First, stock picking is a mug’s game. It is next-to-impossible to pick the companies that will perform well over the long term.

Google, Facebook (Meta), and Apple are behemoths today. It may feel like they will always dominate the corporate landscape and are therefore a safe bet; but a look at the history of corporations on the S&P 500 list shows that’s probably not the case.

It turns out that the S&P 500 list has a revolving door, according to Ben Carlson.

As Carlson notes,

Stocks can and will go out of business.

Index funds do not.

Buy a low-cost, broad-based index fund that is sure to include the winners and wait it out.

Reason for optimism

One of the points that I made to my student regarding question #3 is that I believe in innovation, human creativity, and the desire for improvement.

Are the problems we face very serious?

Absolutely.

But I do think that human ingenuity and technological advances will help us with some of the most pressing issues we face today.

Take this example from Dan Heath’s book Upstream: How to Solve Problems Before They Happen:

In 1894, when more than 60,000 horses were transporting people daily around London, the Times predicted that, “In 50 years, every street in London will be buried under nine feet of manure….”

At the first international urban planning meeting in New York City in 1898, the horse manure crisis was the talk of the conference. Fortunately, as we all know, the crisis never came. It was relieved by the advent of the automobile. (And, in turn, it’s now the car’s excretions – CO2 and particulates – that have caused us big problems.)

Heath used this story to demonstrate that sometimes we have what he calls Problem Blindness, where we focus on the wrong aspect of an issue. I like this story for a different reason: The urban planners of 1898 were focused on horses and their output. The question they were asking themselves is what to do about the manure. The solution, in the end, didn’t involve horses at all.

Today, the unexpected consequences of the previous solution have become the problem. I don’t know exactly what the solution to the carbon emissions problem will be, but I do think that science and technology will find one, and marketing-savvy businesses will find a way to generate buy-in from the public at large.

The bottom line is that I agree with Carlson when he says this:

I don’t know how much further stocks have to fall or how long it will take to make your money back but some combination of innovation, profits and the human desire for improvement make it difficult to bet against corporations over the long haul.

Tips to get through the turbulence

  1. If you have extra cash, make the best of the fact that the market is on sale. It’s time to buy low.
  2. Keep your money in low-cost, diversified index funds.
  3. Don’t look. Seriously. If you have index funds, just let them do their thing and look away while the markets work their way through this difficult time.
  4. Keep reviewing the fundamentals of investing. Sometimes, we need to remind ourselves of the basics to ensure we don’t do something rash and harm our returns.
  5. Surround yourself with like-minded investors so that you can wait out the turbulence together. Talking won’t hurt you, but selling might just.

 

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4 Responses

  1. Doris, great advice as ususal! Having personally invested through the tech melt down, the financial crisis, then the covid correction, your advice is bang on. Set a good plan, stick to it, and ignore the ups and downs. And when things go on sale, buy more. A couple of years from now if you do, you’ll be wealthy!

    1. Thanks for dropping by and chiming in, Mark. It’s great to hear from someone who has had a lot of experience with bear markets. I appreciate your comments!

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