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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31 thoughts on “Ostrich Strategy – Top Tip for a Down Market”
I like it, a positive application of the Ostrich method which we’re usually taught to fear.
I’m with you in avoiding the news and not panicking..although the next recession will be my first with significant amounts invested so I will really feel it.
It’s not fun, but you can make it through OK as long as you don’t panic
Completely agree with your thoughts on dealing witharket volatility. There is research to show that media thrives on sensationalism. Checking figures regularly and watching financial media would be commiting Harakiri.
One piece of advice from the boggleheads that I really liked was about rebalancing one’s asset allocation. When the markets are low and your stock valuations go down, rebalancing will prompt you to buy more to bring the equity portfolio back to the decided ratio. On the other hand, it will also promopt you to sell when the allocation goes much higher, some times on the back of inflated valuations.
This logic could help us act rationally in a time of high negative emotions.
Sorry, typing out a comment on the mobile leads to some typos :-/
Yes, I have it in my investment policy statement that I rebalance each year to my desired asset allocation. The once a year is to keep me from doing it too often
I love the term “Ostrich Strategy”… I’ll make sure to apply this when we hit rocky times in investing!
Become the ostrich…. 😀
Love the post! Great minds and all…
I’ve technically been an adult through 2 market downturns (early 2000’s and 2008). The early 2000’s had virtually no impact on me since I had nothing personal invested at the time and wasn’t financially literate yet. In 2008 I had some money invested in my companies 401k and a small amount in a brokerage account. Fortunately, I was successful in deploying the Ostrich Strategy. I just stopped watching the markets for several years. I had plenty of life distractions (getting married in 2007 and having our first baby in 2009) that made the Ostrich Strategy easier to implement.
It’s great when life helps you become an ostrich, just when you need it most!
This is good advice, Liz!! Sometimes not looking is the best strategy, especially if you’d be tempted to invest less or sell otherwise. Yes, it is so much harder to stay the course in a down market (and I have to speak out loud to myself that I’m buying more shares cheaper!). I still check my net worth a lot but I’m probably less inclined to buy extra shares than I would otherwise. Good reminder to do it anyway.
I may check it more next time, but in 2009 I was 28/29 and it was my first major downturn. So not looking was the best strategy for me at the time.
Love the ostrich strategy metaphor. Me, I don’t do a damn thing different when things go down. I still invest every month, and I update my 20-year old spreadsheet every month. I’ve been through bears before and seeing my numbers go down doesn’t scare me the least. I don’t enjoy it, but it reminds me that it’s just another trough in the wave.
That’s the good thing about having been through bad markets-you have a better sense of how you’ll react. I know in 2008/2009 there were a lot of people who panicked at exactly the wrong time
We didn’t have a lot of money invested when the stock market when down last time. But we watched it go down, and we decided to buy a home. We barely had enough money outside the stock market to make a down payment. We watched it like a hawk, and withdrew the whole lot just in time for future payments. We didn’t lose any money, but didn’t gain much as it came back. The real estate value shot up more than the stock market (this was in India), so we were okay.
The next time it goes down, we are determined to buy more – something we didn’t do last time. Hope we can!
I’m hoping I’ll buy something cheap next time! But last time I did buy through dollar cost averaging, and that worked out well
I like this term! It’s probably one of the few times ignoring a bad situation is better for you! Plus when it has a name, it feels like a legit strategy.
CMO, I’m one of those that says I won’t do anything rash, without living through the experience. I have narrated your story to Mr. ETT before though, particularly how Mr. CMO had to step in (just priming him for when the time comes!) I’ve also told him how you didn’t look for a year, and I think that’s my best plan of action. Maybe I’ll have to take up knitting to keep me off the Intereebs and my hands busy.
That’s a perfect plan! Distracting yourself by just going out and living life is the best remedy. It’s important to remember that a downturn can last longer than you think, and can be bigger than you imagine. I hope Mr. ETT has been taking notes so he’s there when you need him!
I recall numerous colleagues transferring out of their 401(k) mutual funds to money market accounts during the 2008 recession. I think some even stopped contributing to their 401(k). I’m pretty sure most of them missed the rebound or at least left money on the table by returning late.
We just kept things as is, making our normal contributions each check. I think our plan worked out pretty well.
It sure did! I also had a lot of colleagues who made a variety of mistakes in 2008/2009
I was super lucky in 2008/2009, I thought retirement was REALLY far away, so I shrugged and kept adding to my 401k. Now I know about FIRE, so my goal isn’t 65 anymore.
The company I was working for closed at the end of 2007, and then the temp job I did find was in question as that place was being sold at the end of 2008. The company I worked for in 2009 furloughed some people and gave everyone else a pay cut.
The last time I was looking for a job was the longest search. Increased years of experience plus standards after a really bad experience with management meant I was picky or in the just slightly over or under qualified range. I went through a fair amount of savings so I know I’m more heavily in cash than other bloggers would advise. I sleep ok at night and am working on my comfort level with putting more into the market.
I am a let it ride kind of person. Boy did the market eventually bounce back nicely. Patience paid off. I have rebalancing scheduled, so no stress about timing. I figure my 401k and HSA are DCA vehicles. First time this year I maxed my Roth in early January. 🙂
I try to not be too ostrich like so I can stay aware and learn, both about myself and others.
I agree that when you’ve been through a job loss or other event where you’ve needed a lot of cash, you have a much different perspective on a cash fund vs someone who didn’t have those things happen. I also hoard cash, but I had to deal with my husbands factory closing during the Great Recession, and his medical emergency
I had my 401k account during the bearish run in 2008 and like you, I didn’t look at it all. And also I wasn’t into investing back then and didn’t know much about my 401K account. But when I logged in for the first time in 18 months, I looked at the graph of the account and saw that it was climbing back to its value before the huge plunge.
That recent downturn last month, I didn’t log in to any of my accounts during that time too. I recently logged back in about a week ago and saw that it’s already a bit higher before the the slight dip happened.
So I’ll just use the ostrich strategy the next time it happens, it will help me not panic and make irrational decisions.
Sounds like you’re already a fellow ostrich strategy fan, and you didn’t even know it! 😀
“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.” To my mind this is the key takeaway – be a good, steady saver and you’ll stay afloat come rain or shine!
Just out of interest, do you have any particular views on the Japanese stock market bubble (I’m not saying we’re seeing a repeat of that but that’s the only example I’m aware of where the equities bubble was so large that a peak-tough-peak recovery may not occur within the timeframe of a human lifetime)?
Good question. The Japanese stock market bubble was a difficult case. They rose 10x in just a few years, and traded at 60 times earnings. If that ever happens here we would need to start being concerned. Luckily we’re not near that point. It’s also a good case for making sure your investment strategy is diversified. Here’s an interesting article I found on the subject, if you’re interested in reading more. https://www.irishtimes.com/business/personal-finance/japan-s-stock-market-drought-should-investors-be-spooked-1.3304077?mode=amp
FYI ostriches don’t stick the heads in the sand
They place there ears to the ground to here vibrations of potential predators coming
But I like your overall thoughts Good plan
You’re bang on with this Liz! Although, I’m a glutton for punishment and I typically still watch the car wreck, while it’s happening. I’ve learned to have some type of “hedge” that will offset something…so I can at least have some fun watching that go up. You’re point about “you don’t know how you will react when you’re living it / or while it’s happening”, is so right. Some stocks can and do go to 0.
I keep a good amount in cash, savings bonds, and other lower risk investments specifically because I have a good sense of my risk tolerance from prior market downturns. 😃 100% stocks is not my risk tolerance
I am a big fan of the Ostrich Strategy!