For starters, today’s blog is officially my first from a temporary “quarantined” status. Looking on the bright side of things, I’m working in sweatpants and I had these two beauties deliver me breakfast in bed for my birthday!
I don’t want to get too used to this, but not a bad day 1.
Now onto the topic at hand—stocks! Over the past few weeks, we’ve seen our first bear market in 11 years (defined as a 20% drop from a peak). We’ve seen fear and panic set in as a global pandemic ensues. Everyone expects the next few months to be rough, as businesses go remote and/or shut down. Governments throughout the world, along with our Federal Reserve, are going deep into their playbooks to cushion the blow.
The question at hand is, how to view and handle stocks at a time like this?
I think it’s important to know what stocks are and how they react. First off, let’s remember that when you buy a stock, you’re buying ownership in a company. Not just any company, but one of the largest companies on earth.
Here are a few things worth thinking about during times like these.
Are all these massive companies instantly worth 30% less than they were a few weeks ago? Of course not. Will there be some down quarters? You betcha! Will companies like Walmart and Google not go back to the behemoths they are, once things normalize again? I see no evidence otherwise.
This is what we expect when investing in stocks, right? Anyone that’s ever worked with us has heard this dialogue. Stocks are volatile. They go up and down, but the longer you hold them (generally speaking), better growth opportunities present themselves.
This is why we create a risk tolerance based off of your ability to stomach a down turn, not trust your gut. When investing at the onset, we discuss risk and reward. Then we structure a stock portfolio you’re comfortable with. Remember to remind yourself of that, as we made these decisions during more normalized markets in preparation for abnormal markets.
25% of the time, stocks are down. Statistically speaking, we know this is going to happen once out of every four years. We knew it when we started investing, I’m reminding you of it now, and will continually do so after the fact.
We can’t have the ups without the downs. It’s logistically impossible to enjoy the massive increase in the stock market, without experiencing the down turns. It’s like any good relationship. There are downsides of all relationships. What you’re experiencing now is those of stock investing.
Cooler heads prevail. Emotions and money don’t work. Casinos are built on this fundamental certainty. If you are able to take a step back and remain calm you’ll inevitably come to what you know is the best outcome. Conversely if you act with emotion there is a good chance you will do something detrimental to your finances.
Stocks are forward looking. The dip has happened already folks, even if it dips a little further. It’s important to remember that stocks are forward looking, usually about 3-6 months. That means they have, by in large, factored in that things will get worse before they get better.
You only lose when you sell. It’s fun to see your balance sheet increase during good times, and painful to see it drop during the bad. I remind people all the time that you haven’t realized a loss or gain until you sell. Think of your home during the ‘08 bubble—those that got crushed were those that sold. For others that stayed in their home and kept paying their mortgage, they didn’t gain or lose anything. Remember this and do it often!
Stocks recover quickly, and I mean very quickly. During the Tech bubble and the ‘08 crisis things looked bleak, then they hit rock bottom. Within two months, stocks recovered 20-30%. Typically, things steadily increase over the next few years. At first, it’s a large gain really quickly. You can’t afford to miss it. I assure you—stay invested.
Have some stock perspective. The ‘08 downturn took 16 months and had a 51% decline. What happened from there was a 130-month, 450% incline.
Trust me when I tell you there’re very few people who have the perspective I have. I work with hundreds of clients and have been communicating with tons of them over the past few weeks. Most of the people I’ve spoken to have the right mentality that this too will pass. Remember, it takes sunshine and rain to make a rainbow. Let us be the sunshine to get you there.
Related: Should I Refinance With Record Low Mortgage Rates Right Now?