This article originally appeared in our monthly newsletter, Fiscal Therapy.
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WHAT I’M THINKING:
Keep calm and stick to the plan (and wash your hands)
Well here it is folks, the stock market drop we all knew would eventually come. U.S. stocks were down around 12% this week, while global stocks aren’t doing much better. By now you’re plenty familiar with this chart showing the carnage:
Scary, I know. But hopefully you’ve also seen this chart:
Now it doesn’t look so bad, right? (That's the S&P 500 over the last 10 years.) In times of market turmoil — or any turmoil, really — it’s essential to keep perspective.
We expected a market drop
On average, the U.S. stock market experiences a 20% decline (a.k.a. a bear market) every 3 ½ years. We haven’t seen one since the Financial Crisis, so we’re overdue. And we invest expecting major dips like this one.
We still expect long-term growth
The coronavirus has cut into corporate earnings globally and will increasingly do so in the U.S., which is a big reason why the stock market has dropped. (Fear and uncertainty are other big reasons.) However, the long-term outlook for U.S. businesses (think 10 to 20 years) remains good. Even with this recent drop, we've seen roughly 175% growth over the last 10 years. For even more perspective, here's the last 15 years:
The trough around 2009 is the Financial Crisis, when the U.S. market lost about half its value. Despite the heavy toll it took on the economy and individuals, it proved to be a detour for the market's long-term growth. Will the stock market see more drops due to the coronavirus? Probably. But do we expect the markets to recover and continue to post gains over our long-term investment horizon? Yes.
There’s a lot of noise out there
The market drops and volatility we're seeing are exacerbated by investment firms and options traders who make a living trying to beat the market in real time. That's not our philosophy. So tune out the noise and stick to your investment plan.
Your checklist for when the market tanks
Here are some practical steps (and non-steps) to take in any market decline:
Resist the urge to sell. Reflexively selling stock positions in response to a market drop is one of the worst things you can do. Why? Because you’re locking in losses by selling low, and you probably won’t get back in the market until it’s gone back up — guaranteeing that you’ll miss out on the gains. Stock market recoveries tend to happen in bursts, so missing even a few big days will hurt you long-term. (See this handy graphic in item 3.)
Check whether you need to rebalance. Rebalancing is a healthy part of any investment plan. Why? As the market goes up and down (and down … and down …), your portfolio will naturally drift away from your target allocation of stocks and bonds.
For example, if you were holding 80% stocks and 20% bonds a week ago, the proportion of stocks in your total portfolio has now dropped. If you’re off-target, now may be a good time to rebalance by (at least for retirement accounts) selling bonds and buying stocks. This also has the nice benefit of forcing you to sell high (bonds) and buy low (stocks) in a disciplined way. (If you use a robo-advisor like Betterment or invest in target-date funds, the rebalancing happens automatically for you.)
For taxable accounts, you don’t want to be trading willy-nilly as there are capital gains consequences, so either rebalance by investing new money in the underweight category or be sure to know how to manage your capital gains and losses.
Give your investment account balances a break. Mint and Personal Capital aren’t Facebook. Once you’re on track with your plan, set it and forget it is your mantra.
What I’m Reading
Freaked Out by the Stock Market? Take a Deep Breath
By Ron Lieber, The New York Times
Just in case you don’t believe me, take it from money guru Ron Lieber:
So, stop. Think. Talk to someone with more experience, or a sober-minded approach. Shift a bit of your portfolio to cash if it helps your anxiety. But drastic investment moves are sensible only when there have been drastic changes in your life, like a big new job or consequential medical news. And that hasn’t happened for most of us this week.
Side note for parents: check out Lieber’s excellent book The Opposite of Spoiled for how to raise kids with a grounded, healthy perspective on money.
The Nuclear Family Was a Mistake
By David Brooks, The Atlantic
This one is a doozy. Here NY Times regular David Brooks questions our ingrained vision of two parents and 2.3 children as the ideal American family unit. For most of human history, extended families lived together with a richness and resilience that small nuclear families lack. But the modern story of nuclear families has largely been one of brittleness and brokenness.
If you want to summarize the changes in family structure over the past century, the truest thing to say is this: We’ve made life freer for individuals and more unstable for families. We’ve made life better for adults but worse for children. We’ve moved from big, interconnected, and extended families, which helped protect the most vulnerable people in society from the shocks of life, to smaller, detached nuclear families (a married couple and their children), which give the most privileged people in society room to maximize their talents and expand their options. The shift from bigger and interconnected extended families to smaller and detached nuclear families ultimately led to a familial system that liberates the rich and ravages the working-class and the poor.
What does this have to do with personal finance? Among my clients and friends and in my own home, I see how hard raising a family is, particularly in the city. Day care is exorbitant, a non-working parent is a luxury, no one has any margin. But those who have a nearby grandparent ready and able to dote? They hit the jackpot: free childcare, school pickup covered, maybe even some extra home-cooked meals. We can’t all have grandma and grandpa nearby, but maybe we should be a little quicker to invite them to visit and stay for awhile.
If you’re ready for financial guidance, accountability, and an action plan, check out our one-on-one services or online courses.