If you haven’t heard the news, the U.S. stock market is in amid quite the tumble over the past few days of trading. Investors are worried about the Global economy and China’s economic slowdown. There was a huge sell off that caused it to drop 1,000 points (nearly 8.5%) yesterday, causing HUGE headlines to come out:
“After historic 1,000 point plunge, Dow dives 588 points at close”
“Dow Plummets Amid Global Sell-Off”
“Dow Jones Has Worst Day of Trading in Four Years”
Fear ensues. Many people are asking the question, “what should I do?”
Understand What Your Investments Actually Are
Investing through your work 401k or opening an IRA is the most common mode of investing for most typical American workers. This is a GOOD thing, as these accounts have tax advantages to them, and some allow you to automatically invest straight from your paycheck. The problem is that most people are disconnected as to what they are actually investing in, and that can cause fear when running into a market dip like we have seen in the past few days.
If you’ve read the book I have recommended a few times (Millionaire Teacher), you’ll hopefully be invested in index funds. If you aren’t, you’re probably still invested in some sort of mutual funds or bond funds within your work 401k or IRA. Those funds own a variety of stocks and bonds. The bonds are a fixed-interest rate loan to a government or corporate entity, hence why they are seen as more stable. And those stocks actually represent owning a piece of the company.
Should I Sell?
So, when the market drops because of some bad news elsewhere, do you really this those businesses (and we’re usually talking Microsoft, Johnson & Johnson, Apple, Amazon, etc.) are suddenly going to go into a tailspin and close their doors? Or do you think they’ll do what they always do, and continue to innovate, create and sell products that improve people’s lives every day? Will they just hang up their boots and stop producing, or find ways to do it leaner and better?
Hint: The answer is yes, they will continue on. And you own the same percentage of that company before the market goes down and as you do after. You still own the same amount of stocks,. You have not lost any money. The only way you lose money when the market goes down is if you sell your investments. That is called LOCKING IN YOUR LOSSES.
DO. NOT. SELL.
Ok, Then What Should I Do?
The first thing you should do when you see bad news about the market on your TV or online is to follow John Bogle’s advice. He interviewed with CNBC yesterday and had this to say:
“Don’t do something. Just stand there.” – John Bogle.
Jack Bogle founded Vanguard Investments, the world’s largest mutual fund company. He is telling investors what he has told them for decades. DO NOT SELL!! When the markets drop, the worst thing you could possible do is sell, because that guarantees that you will lose money. Not only that, but when you pull your money out of an IRA or 401k, the government PENALIZES you, and taxes you on all the money removed. The penalty and the taxes of a large withdraw could cause you to lose almost half of that money to Uncle Sam, not to mention the money lost by selling low.
You don’t need that money right now. So why would you risk losing a TON of it by selling when things are bad? Long term, the S&P 500 Index shows a annualized rate of return of about 10%. This doesn’t mean you will get 10% every year, but the index has proven that is can return about 10% over a long period of time. When you try to time the market, you risk missing out on that return.
Don’t Miss Out, Stay In
For example, JP Morgan ran a study that shows the effect of missing out on the 10 Best Days in the stock market. It showed $10,000 invested in Jan. of 1995 in the S&P 500 (hint: Vanguard has an S&P 500 index fund) and how it fared after 20 years (Dec. 2014). The annual rate of return was 9.85%, which resulted in the $10,000 turning into $65,453 (Woohoo compounding interest!). If that same person had been trying to time the market and missed just the 10 best performing days over that 20 year period, that portfolio would instead only be $32,665 (a 6.10% rate of return).
WOW. Just wow. Pulling out of the market and missing out on just the 10 best days lost them over half of their gains. $30,000 lost.
Now, that’s pretty bad, and should show you that pulling out of the market because of short-term changes is NOT WORTH IT. But let me tell you another story.
Please Don’t Sell
At work, we have shuttles between buildings (large campus), and I got to chatting with a kind older lady who was driving the shuttle. We got to talking about investing (because my conversations seem to always turn into budgets and money 🙂 ) and she told me something that absolutely shocked me.
Her husband and her were 75 years old, and had come out of retirement to start working again as shuttle drivers. The reason?
They had sold all of their investments (4011k/IRA/Everything) in 2009. They lost HALF of their entire life’s work because they were afraid. They lost so much money that they now had to work (most likely until death) to pay their bills.
And the worst part? They were still out of the market because of what had happened. They hadn’t invested again because “the stock market took half our money.”
This KILLS me to hear, and it’s not the only time I’ve heard this story from someone.
So please, do not walk into this trap. Selling your stocks only GUARANTEES YOUR LOSS. Holding tight and staying in this thing for the long haul if the best strategy, and the best investing minds in the world are saying the same thing. Don’t take it from me, take it from them:
“I have advice for long-term investors,” he said. “I have no advice for speculators.” – Jack Bogle.
Some Resources To Help
If you’ve built up any kind of savings in the stock market, days like today can feel scary. I’ve found some great resources to help ease your mind and show you that long term investing and staying in is really the best thing you can do. And please, if you’re still considering selling off, let’s chat in the comments. I’d hate to see tens of thousands lost because of the fear driven by today’s media.
Books On Investing
Millionaire Teacher – Story of a teacher who retired in his 30’s using frugality and a simple index investing strategy. Helps show how index investing is far superior and much easier than anything else.
The Bogleheads Guide To Investing – Written by people who follow Jack Bogle’s philosophies on investing, great for new investors looking to invest with confidence.
Investing Website Resources
The Stock Series by JL Collins – This series is written by a guy who retired early, back in 1989, and has weather many seasons of stock market ups and downs, and still suggests investing in a single fund.
BogleHeads Forum – This is a web forum where you can ask questions about your portfolio, or simply read the advice given to others by seasons investors and those who have made it to retirement through wise investing.
P.S. Just to let you know I walk the talk, I am 100% invested in a Vanguard Index fund currently. My returns will rise and fall with the market, but long term I will beat 80% of all managed funds out there, and pay WAY less in fees 🙂
Disclosure: There are some affiliate links to books in here. I highly recommend them and they WILL change your financial life 🙂 I do receive a small compensation if you sign up using my links, as always, any support is greatly appreciated.