As I’ve read through my fellow personal finance blogger net worth statements recently, I’ve noticed one thing they all have in common. They’re all down for the month. Given this, I thought it was the perfect time to introduce you all to my top tip for dealing with a down market. I call it my “ostrich strategy”.
If you pay any attention to the stock market, you’ve certainly noticed that it’s been having a rocky time lately. The first month of the year started off crazy strong, gaining six percent in just a month. Articles from the so-called “financial experts” followed proclaiming that a strong start to the year certainly meant a prosperous year.
Then came February, and the harkeners of financial doom came out to roost. Two four-figure drops in the DOW. Market down 1,600 points for the month. Lots of articles about how this time was different, the market was doing the worst it had in years, and talking about whether or not we were in for a real correction this time. Cryptocurrency’s wild ride continued, with Bitcoin dropping (going to $6,000 at one point) and coming up again above $10k, SEC announcing a crackdown, and people continuing to lose money in scams. Don’t forget Buffett’s bubble wisdom when thinking about blockchain.
But did you notice an interesting fact – by the end of February the market was still up for the year? The media doesn’t talk about that part very much. There are many financial bumps in the road every year, most are forgotten and consigned to history. Only a few will stick out in your mind.
History With Market Declines
I mentioned this briefly in my article a few weeks ago about my thoughts on market drops, and I wanted to talk about it a bit more in detail today.
You see, I’ve been an investor through the more recent large down markets. Although I’m still relatively young (37) I’ve invested through:
- The dot-com bubble burst where the NADSAQ lost 78% of its value and $6.2 trillion in wealth was lost
- The Great Recession, where the market went down 50%
- The “lost decade” where the S&P 500 net gained nothing for 10 years
I actually credit those three events to not only teaching me how to deal with significant market turmoil, but also for setting the stage for building wealth in this decade. If you can be a good, steady saver and investor for over a decade when getting no returns, you’ve developed the good financial habits that will set the stage for an up market.
When you invest through a down market, you can literally have your contributions to your accounts evaporate by the next day due to market losses. Talk about depressing. Your 401k contribution goes in, and *bam* it’s suddenly gone.
Smart investors know that your contribution isn’t really gone, even though it sure feels that way. Your money bought shares, and the number of shares are up. The lower the market goes, the more shares you buy for the same amount of dollars. This is where dollar cost averaging really shines – those additional shares stay with you and go to work for you when the market marches up.
What Is The Ostrich Strategy
Basically – stick your financial head in the sand for a while.
In the scary times of 2008-2009, where the market went down 50%, I stopped looking at my net worth for a year. Literally.
I’ve tracked my net worth faithfully since I was 20 or 21. My current spreadsheet goes back to when I was 26, in early 2007. Here are the dates of my earliest entries:
- 2007 – January, August, December
- 2008 – June, November
- 2009 – January
- 2010 – January, September
Side note – you can see that I used to not really have a regular schedule for my net worth calculations. Nowadays I do it quarterly, but back then I just did it a few times a year, when I thought of it.
The market bottomed in 2009 after going down 50%. The entry for November 2008 shows my net worth down significantly with my 401k down 34% and my IRA down 41%. They would have gone lower had I continued calculations into 2009. My husband also lost his job in 2009, compounding the issues we had with the down market (his factory closed permanently). So I just. stopped. looking. I didn’t calculate net worth for all of 2009, and didn’t watch my account values for a long time. I didn’t log into my financial institutions to see how my accounts were doing. I simply stopped looking at all for a long time.
Financial automation, automatically telling you how much you lost every day, is the enemy of this strategy. Logging on and seeing days, then weeks, months, or years of savings and investing evaporate is…discouraging. It can also frighten you into doing something that you’ll regret later.
Don’t Think You’re Different
I see so many people out there who have no real experience with down markets bragging about how well they’re going to do. They’ll be a buyer, they proclaim, not a seller.
I can tell you that if you haven’t actually been through this, you have no idea how you’ll react.
I thought the same thing before 2008/2009. I had read all the books, and quoted Buffett’s wisdom to “be greedy when others are fearful, and fearful when others are greedy”. I thought I was ready to deal with a market decline. But frankly I had no idea how bad it would actually feel when it hit.
It was my husband that had to remind me of all that wisdom I quoted during moments of panic, when it seemed the down market would never end.
I would like to remind those that were not investors from 2000-2010 that the market can stay down not merely for days or weeks, but months or years. Your net worth can go back in time several years in the blink of an eye. This can tempt you to make changes that will not be good for you in the long run.
So if you haven’t actually been through a down market, don’t dismiss just how bad it can feel to keep putting in money and watching it evaporate away the next day. Recognize that you’re likely to make the same kind of mistakes as everyone else. And if you start to feel bad, re-read your investment policy statement (you do have one, don’t you?), remove those financial apps from your phone, don’t calculate your net worth for a while, and go out and live your life.
You can always check it again in a year.
I Want To Hear From You!
Let me know – have you been through a down market before, or will the coming correction (whenever it is) be your first? How did you feel about the ups and downs of February?
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