How to Handle the Current Stock Market Slump

As Charles Munger, senior partner of investment guru Warren Buffett, once said, “Sometimes the investing ‘tide’ will be with us and sometimes it will be against us, but the best thing to do is to just continue to focus on swimming forward.”

In times like these, when the stock market has suffered steep drops without an end in sight, it is easy to think it might be time to give up on stock market investing. Investors are facing a test unlike anything seen in over a decade. Investors are worried. Billions of dollars have left stocks. The “herd mentality” tempts us all. Should we stay? Should we go?

In order to stay centered on an investment strategy, keep the following things in mind.

Bear Markets Are Part of the Investing Experience

Just like choppy waters are part of the ocean swimming experience, volatility is an essential part of investing. Because there is risk when investing in businesses, there is return. If this investing stuff was easy, investing return would be very low. It is by taking on stock market risk that we eventually get to experience the reward of capital markets.

From 1984 to 2018, the S&P 500 Index experienced a median intra-year decline of -9.9%.1 Yet stocks still posted positive returns in 29 of those 35 years with a median annualized total return of 13% and an average annualized return of 11%.1

Bear markets are always scary, but only devastating if you sell in the midst of them. There have been 12 bear markets since 1901, lasting an average of 22 months with an average decline of 42%.2 Swimming through turbulent waters can be unnerving, too. And yet the only way to get to your destination is to keep on swimming.

The Best Stock Market Returns Often Come After the Worst

Despite 2008 being the center of the Great Recession where at one point markets were down over 40%, 2008 also had seven of the 20 best return days for the Dow Jones Industrial since 1945. 1

Missing even the 10 best days in the market reduces returns by almost 50% in the last 20 years.1

I would love to have a crystal ball to tell you when the best and worst days will come. No one has that crystal ball, which is why the sensible investors avoid market timing and stay the course with their asset allocations.

Your Portfolio Is Based on Thousands of Businesses, Not Predictions

Stocks go up over time because earnings improve. Ultimately, the driver of return is the underlying businesses. Granted in times like COVID-19, many businesses will experience dips in their product and service sales. Some of those businesses will not recover. On the other hand, other businesses will rise to the occasion. New businesses will be born. Staying diversified offers you the chance to gain return over time, despite many businesses struggling.

Don’t Fall Into the Trap That This Time Will Be Different

Each generation has faced their share of challenges. While experiencing the challenges, we become overwhelmed by the severity of the moment. History has dealt serious blows whether it was the Global Depression, cold wars, hot wars, presidential assassinations, or pandemics. When viewed through the lens of history, we know that even the worst turbulence has not stopped the inevitable climb of the stock market. Why is this? Humans are remarkably resilient. In our free market system, human potential for solving problems will eventually rise to the occasion once again.

Your Future Self Is Counting on You to Stay the Course

Most financial plans, whether saving for college, retirement, or a house, are based on achieving a rate of return that can only be realized by staying the course. Your plan is no different.

Take a page from Warren Buffett. When asked by CNBC in 2009 how it felt to have “lost” 40% of his lifetime accumulation of capital, he said it felt about the same as it had in the previous three times. 3

The bottom line is that market corrections do not equal a financial loss unless you sell.

What Can You Do Now?

Now that we are in a crash, what are the sensible steps to take:

• Be less interested in your statements. Checking them once a quarter is more than enough for long-term investors.

• Resort to stock market history. Refresh your memory on other near-death investment moments that turned out okay. Two interesting reads in this category are Stress Test (Geithner, 2015) and Boom and Bust: Financial Cycles and Human Prosperity (Pollock, 2010).

• Stay true to your allocation. Though it takes some degree of intestinal fortitude, check your percentage of stocks relative to bonds, and if under your target, add more to your stock funds.

• Invest more. Once you have high-interest debts like credit cards paid off and an emergency fund in order, add money to your investments consistently over time, perhaps even taking advantage of market dips.

• Control what you can. There are many actions you can take, including a thorough review of your spending priorities, tax planning such as adding to IRAs, or Roth IRA conversions at lower asset values. Another wise move might involve harvesting tax losses in taxable accounts.

The tide will eventually turn. Though tides are easier to predict than stock market movement, you should continue to swim as competently and as calmly as you can.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks.



References

1. Invesco. (Oct. 17,
2019). Compelling Wealth Management Conversations 2018. Retrieved from: https://www.invesco.com/us-rest/contentdetail.

2. JP Morgan. (Dec. 31, 2019). JP Morgan Asset Management
“Guide to the Markets,” p. 14.

3. CNBC. (Mar. 9, 2009). TV interview with Warren Buffet.