Forget Halloween – February 5, 2018 is the new deadliest day. On that day, the Dow Jones Industrial Average (DJIA) fell about 1,600 points, the largest point drop in trading history. If you felt compelled to sell all of your stocks and accept the money, you were not alone. However, it is during times like these that you must remain calm and adhere to your original financial strategy. Here are a few things to keep in mind if the stock market falls any more.
1. The historical average return on stocks is close to ten percent.
Take it from Sir John Templeton, who founded one of the world’s largest and most successful international investment funds. “The four most dangerous words in investing are ‘This time it’s different.'”
While losing one percent of your 401(k) value in a single day may appear to be a major setback, the fact is that it will most likely be a little blip on an otherwise smooth ride. From 1968 to 2017, the S&P 500 returned an average of 10.05 percent. Even when looking over a shorter period of time, this indicator of the general health of the stock market performs admirably. From 2008 to 2017, the S&P 500’s average return was 8.42 percent.
2. The longer the holding time, the greater the average return.
The notion of “buy and hold” has been around for a long time, and it’s an important thing to remember when the market is bumpy. Experts have traditionally advocated for perseverance during difficult circumstances.
“The market pays a premium to those willing to endure the angst of watching their net worth fluctuate beyond what Wall Streeters call the’sleeping point,'” stated former Federal Reserve Chairman Alan Greenspan.
Warren Buffett, often known as The Oracle of Omaha, famously said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
Here’s an example of why buy-and-hold is valid: During the 2016-2017 and 2000-2017 years, the S&P 500 index gained by 21.64 percent and 102.5 percent, respectively. Going the extra mile in investing pays out handsomely.
3. Great time to get discounts.
Consider the last time you purchased that new automobile, stylish new dress, or cutting-edge 4K TV that you’re so proud of. You probably spent days waiting for the right opportunity to strike a deal. You seized the opportunity when it presented itself. So, why should buying stocks be any different? Wouldn’t you want to acquire a share of a well-diversified portfolio or shares in a terrific firm at a discount?
If you bear in mind that the historical returns on stocks are close to 10% and you intend to buy equities regardless, consider buying when stock prices are lower. After all, you have heard the phrase “buy low, sell high,” right?
4. Risk tolerance varies with time.
Several milestones will influence your outlook on life, including getting married, purchasing your first house, and being only five years away from retiring. Investing is no exception. If a market downturn hurts more now than it did five, ten, or fifteen years ago, you should reconsider your portfolio allocation.
There are several investing possibilities, including bonds, annuities, and mutual funds. If you believe you need to reduce your exposure to equities, you may redirect those money to financial vehicles that are better suited to your current outlook on life and investing.
5. Trading incurs expenses (most of the time).
According to a 2018 TD Ameritrade poll, more than 75% of Americans are unaware of how much they pay in 401(k) fees. Even worse, 37% of those polled believe they do not pay any 401(k) fees at all. The truth is that all 401(k) plan members pay some kind of cost.
Trading can result in several of these expenses. For example, a fund may include a redemption charge that compels you to hold onto your fund shares for a certain amount of time or pay a cost ranging from 0.01 to 2% of the transaction value. Firing transactions without being aware of the related costs might have a negative impact on your 401(k) balance.
6. Sell for an objective purpose.
So far, we’ve explored why you should stay onto your investments or even buy more. However, there will be instances when you have a good cause to sell your stocks during a market slump. Here are some instances.
Tax loss harvesting: If you anticipate a substantial tax burden in a given year, you may be able to balance taxes on both gains and income by deducting actual losses from your assets.
Portfolio rebalancing: The balances of certain asset classes shift over time as prices rise and fall. As a result, you may need to make a few trades to rebalance your portfolio.
Dramatic shift in corporate policy: Assume you purchased a stock only because its board of directors had paid a dividend every quarter for the previous ten years. Would you still want to purchase the stock if the company’s board decided to stop paying dividends?
Just because the stock market fluctuates does not indicate you should make a move. Stick to your original financial strategy and remember that equities beat most other sorts of investments over time. This may include turning off the financial news for a spell to avoid reinforcing your anxieties. In the long run, you should do OK.
