I was originally planning to do a quick post on a few other places you can catch me lately, but after yesterdays market drop I decided to add in a few thoughts about market downturns. You can still find where I’m appearing around the personal finance community towards the end of this article.
I’ll talk about my perspective, having been an investor for 20 years (since I was a teen), having gone through the dot-bomb and Great Recession. I never sold, and kept dollar cost averaging. That’s what I’m planning to continue to do – execute on my investment policy statement. Don’t have one? Make one today.
Thoughts On Market Drops
You’ve likely seen the headlines, heard co-workers talking about it, saw it on the news or heard it on the radio. Yesterday, the DOW dropped by 1,175 points – the single worst one-day point drop ever.
I first knew yesterday something big was happening in the market when I could hear my co-workers over the wall talking about it. Whenever you don’t work in the financial field, your co-workers talking about the stock market is an unusual thing. So I popped over to CNN to see what was going on, and got to witness the bloodbath of the market in the last several hours of the trading day.
Even though this was the biggest point-based drop ever, it was not the worst day in the stock market:
- The infamous Black Monday in October 1987 saw a 22.6% loss. In comparison, yesterdays loss of only 4.6% pales in comparison
- In 1929, the stock market fell by 12.8% in a day
- What about during the dot-bomb of the early 2000’s? In September 2001 the market lost 7.13% in a day
- The Great Recession? October 2008 saw a single-day loss of 7.87%
In comparison, yesterday didn’t even make the top 20 biggest percentage losses of all time. The media is all up in arms about it because it was the single largest point drop (even though percentage is a better measure), and because we haven’t seen big losses like this in a day in several years. Some of my friends just starting off investing may never have seen a day like yesterday. There was a down week last week, and we’re down more.
This is not the time to panic. Although I can’t tell you what tomorrow will bring – the market can continue to go down, or it could start marching back up again – I can share with you the wisdom I’ve found helpful in my 20 years of pursuing financial independence.
- Remember Mr. Market – This is an analogy that our friend Warren Buffett brings up to explain market behavior. Mr. Market is, essentially, a drunken psychopath. He does not really care about the underlying value of the companies represented by the market. One day he will offer to buy your shares, or sell you shares, for a dollar. The next day, he may offer ten dollars. The next, fifty cents. Nothing about the underlying companies or the market conditions has significantly changed – just Mr. Market’s whims. Don’t get caught up in his drunken psychobabble.
- “Be greedy when others are fearful, and fearful when others are greedy” – More Buffett wisdom that my husband had to remind me of during some of the scariest Great Recession drops. Have others seemed a bit greedy to you lately? Bragging about their gains, no losses, investing in the market when they never have before? Your hairdresser giving stock tips (or talking about Bitcoin)? That is the time to be fearful. Is everyone talking about how the world is coming to an end? That would be the time for you to be greedy.
- “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch. Do you know how many times people have called “the top” or said that the world was falling, only to be proven wrong? Check out this famous thread on Bogleheads about “US Stocks in Freefall” starting in 2011. Do you know how much money those folks would have lost out on, had they listened to the “freefall” comments and stayed out of the market? A lot. I know plenty of folks “waiting for the drop”, and even people who bought yesterday just because the market went down. This is silly. The market can go down a lot more than it has. Be patient.
- “Stay the course” – Taylor Larimore. Advice from my favorite Boglehead. He posts this frequently in response to questions about timing the market. Should I buy now because the market went down? Sell it all in anticipation of an upcoming correction? The answer is usually no. If you’re a wise investor, you already have planned what you’re doing in the case of market ups and downs. If you haven’t, refer again to my investment policy statement article and create yours now.
Just stay the course with your plan. If you weren’t planning to invest at a specific level of drop, don’t put money in just because the headlines are telling you the market is down. Remember that it can keep going down – the market can stay irrational longer than you can stay solvent.
Conversely, if you’re nervous, don’t talk yourself into selling. Stay the course with your plan. And if you think the volatility is too much for you – the ups and downs make you sick – you need to revisit your asset allocation and probably keep less in stocks. Stocks will return the most over the long run, but not in the short term. In the long run, the market is a weighing machine – but in the short run, it’s a voting machine. I think some folks have forgotten that in recent years.
CMO Around Town
I’ve been busy lately, hanging out with my friends over on their sites and podcasts. Check them out here!
Did you miss the guest post I did over at White Coat Investor last week, all about lessons from everyday breadwinning, six figure, millionaire moms? If you did, you need to check it out now.
Will I ever be able to send my kids to college? Actuary on FIRE does an in-depth analysis of my college savings strategy.
Who’s the money master? CMO of course! Listen in on how I increased my net worth by more than my income last year on the Marriage, Kids, and Money podcast.
Women on FIRE
Remember, tomorrow is the first post in my new series on Women on FIRE – all about women seeking financial independence for a variety of different reasons. Stay tuned to check it out!
Tell me – have you been through a market crash? If so, what wisdom do you have for our friends who haven’t? Or if you haven’t been through one before, what’s your perspective? Let me know in the comments!
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Awesome post and I am impressed by your productivity. Putting out good material while raising kids and working. Not easy for sure.
Stay the course!
My favorite saying!
The prices are just back to what they were a couple months past. No need to panic. My favourite quote for investing has quickly become: “Someone else is getting rich faster than you, this is not a crime.” 🙂
Love that one!
So true!
It’s just a sad fact but most people suck at math nowadays, and the concept of a percentage is lost on them. So while the media salivates over click-baity headlines like “biggest drop in history!!”, us who understand math know to just move on…
I personally find it sad and disingenuous that most articles in the media are focused solely on the raw number, and not percentage. The 508 point drop in the DOW in 1987 was much worse than yesterday’s 1200 point drop. It’s the equivalent of today’s market dropping by about 5000 points in a day!
Understanding math is a powerful advantage
I have not been through a market drop but I have a feeling my first one is coming. Honestly, being a part of the personal finance and FI community is really helpful right now. Between articles like this and the knowledge that staying the course is the wise thing, I hope to be able to combat the emotional reactions that could arise!
If you ever need help with that, be sure to reach out. I know a lot of us “old timers” make jokes about it, but I remember very well just how bad I felt during the Great Recession back when I was 27/28. Of course we now know the happy ending, but we didn’t back then. Seeing months-and then years-of savings evaporate in weeks was very, very scary.
There’s an enormous difference, too, between huge past drops and this one (though I too was thinking of percentages yesterday)–the underlying fundamentals of our economy are in good shape. That’s a significant contrast to 08, 87, 29.
Interestingly in 1987 the market ended up for the year. Not so much the other two
If they didn’t sensationalize nobody would read. I get it even if I find it slimy. That being said the best approach is to tune it out and stay the course. As you pointed out tools like an IPS help with that.
For the record I bought yesterday using a solo 401k contribution. My IPS said I should invest it and I did.
Perfect FTF. You executed on your plan regardless of the market moves.
I started a thread on the WhiteCoatInvestor entitled “I congratulate the forum”. I started it Saturday morning because none of the young investors over there who are 100% stocks had posted a panicky thread yet. I think that is because of index investing. The Dow is off 8.5% so far from the peak in January. A correction starts at 10% so in time this current pull back (unless it gets worse) will not even show up on a graph. Stay the course!
Always solid advice! Thought that was a great thread too.
That was truly a great post. It is all about perspective. The market goes up and down. Over the long term, it trends upwards. If a bad day is that upsetting, you might need to re-evaluate your asset allocation.
That’s the truth. I think folks forget about volatility if we go too long without a drop
Haha, love the drunken psychopath metaphor.
Now, I’m not one for market timing, usually, but I can almost guarantee a huge market crash either right before or right after our FIRE date. 😉
Send me an email on when you FIRE so I can sell it all! (Kidding)
I think you sum things up really good with this article. Just sad that media is using the data on a way that infuses fear. Great post, keep up the good work!
Cheers
KvD
It is sad, and I wish they would be more balanced instead of sensationalizing for clicks
Haven’t personally been through a crash before, but my dad and I just had this conversation again yesterday. They held through the last recession and their accounts are up a staggering amount since the last crash. Definitely a good lesson on holding through the lows.
He’s right-stay the course!
My wise Dad always advised me to “set it and forget it”, which is how I survived the 2008 crash. I was so caught up in medical school at the time that I didn’t even really know what had happened until I watched the Big Short years later. I’m much more aware of my finances now, and I have about four times as much invested, so I’m going to have to keep reminding myself to ignore it and keep investing.
I call that my “ostrich strategy”.
Solid advice CMO. Don’t panic,stay the course. Thanks for including me!
Totally with you there AOF!
Excellent post and advice. Dollar cost averaging for the win!