Well, that was a wild week in the stock market.
We have not seen fluctuations as drastic as last week since 2008. In fact, every day last week counted as either one of the 100 best or worst days for the S&P 500 Index, a collection of 500 of the largest U.S. companies, going back to 1928. Wild seems too mild of an adjective.
If you have not checked your IRA or 401(k) account balance in a while, you may want to wait a while longer. Unless your assets are parked exclusively in bonds or cash, it won’t look pretty.
Now is generally about the time investors begin to beat themselves up. We start second-guessing ourselves. We tell ourselves, “I knew I should have sold that stock fund a few weeks ago.” Or, “I had a feeling the market was going to pull back at some point; I should have listened to myself.”
Watching dollars that you diligently saved for many years seemingly vanish in a matter of days is painful. But before we accept that pain, we first tend to play the what-if game.
What if I would have sold before stocks dropped. What if I would have invested more in bonds. What if. What if. What if.
I get it. Money evokes emotion. It’s hard to see clearly when we are blinded by painful losses. For some investors, their emotions are so strong they feel compelled to do something, anything, to alleviate the pain. That usually entails selling the thing that caused the pain in the first place – typically stocks.
But successful investing involves doing as little as possible. That point is often misunderstood. People believe successful investment management requires constant tinkering to a portfolio. Buying and selling. That couldn’t be further from the truth.
And that is doubly true after stocks have already dropped more than 20%. What feels safe in those chaotic times – selling stocks – is one of the riskiest moves you can make. It makes the immediate pain subside, but it almost always inflicts long-term suffering.
When investors pull money out of the stock market, they must subsequently decide when to put it back in. Unfortunately, there is never an all-clear sign to announce the beginning of the next bull market. Money sitting on the sidelines in safe investments can’t participate in the inevitable recovery. And it never feels like the right time to get back in because the best time to get it is when the news is the worst.
So, give yourself a break. Don’t kick yourself or play what-if scenarios in your head. No one saw coronavirus coming. Just like no one saw Pearl Harbor coming or 9/11 coming.
At this point, one of two outcomes will occur. Either the market found its bottom and stocks will go higher from here. Or, stocks will fall even farther from here before eventually going higher. In either scenario, though, stocks ultimately go higher – it’s just a matter of time.
Don’t worry about the past, focus on the future. What are steps you can take now to best position yourself? I can think of three good ones.
One, increase your investments in stocks. They just went on sale. If you had money sitting in the bank, consider investing a portion of it in stocks, if you have the financial ability. If you have a retirement plan at work, increase your savings rate to get more in the market. Perhaps stocks go lower from here – so be it. Over time, you won’t regret it.
Two, if you have a taxable account, look for investments that are worth less than you paid for them. Those investments can be sold at a loss and those losses can be used to offset other gains or deducted from your income, up to $3,000 per year. Tax savings are real dollars you put in your pocket.
Three, consider Roth conversions. You will pay income tax on the amounts you convert, but with the recent stock market losses, those amounts would have been a lot more a few weeks ago. If you convert pre-tax assets now while they are down in value, you capture the upside in a Roth account and avoid all taxation going forward, including future investment gains. Plus, income taxes are at historic lows right now.
You can’t tell the future – no one can – but you can always make the best of a bad situation.