At the time of the time of this writing, the total stock market index is off by 17% from top to bottom. Multiple other indexes are past a 20% decline, which defines the infamous bear market. This is the worst decline from top to bottom since 2012’s decline of 19%. If the total market index or the S&P 500 exceeds a 20% drop, this will be accepted at the worst decline in ten years and an official bear market.
The economic data is generally solid, but no good news seems to stop the current free fall. News stories and social media is more prevalent than ever before and the market is experiencing a rapid decline despite a strong economy. This could be considered an irrational market..
So how do you handle an irrational market?
– Stay calm. The media has been sensationalizing every decline in the stock market since 1929. It is not the Great Depression, there will be no bank runs, and people are not buying stock on 90% margin debt. We will not see a 90% decline and everyone will not be in lines for the soup kitchen. We may not even see a recession, the stock market can decline when the underlying economy is still okay. 1987 experienced a 27% decline in one day, fully recovered within a year. There was not a recession for another four years.
– If you are 3+ years away from retirement, do nothing but cheer the ability to buy ownership in companies at a lower price. Think of this like you’re stocking up a food pantry for use at a later date,. You want to buy food when its on sale, the same goes for stocks.
– If you are currently in retirement and selling equities to live on: Sell ONLY what you need for the shortest increment of time you’re comfortable with. This could mean as short as once per week or one per month to meet your budget.
– If you don’t already have one, write an Investor Policy Statement. What are your goals? What are you trying to accomplish? How much risk did you believe you can take when times were not this hectic. Do you now think you should have a minimum amount of cash available?
– Evaluate your expenses: The “wealth effect” is real. People will naturally spend more when they see their wealth has increased. Are there any areas you can/should cut back on? The additional $10 here, $50 there either left invested in the market or invested today has more buying power than an any other time in 2018. (I found myself browsing Rover today to figure out how to generate some additional funds for investing!)
– Understand the speed of declines: Investments are sold for many reasons including fear, covering margin debt, redeeming hedge/mutual funds, and covering option positions. People and institutions only buy for ownership. This causes the market to go up more often than it goes down, but to go down faster than it goes up.
We can’t predict what the future holds. The market may decline another 3+% and have its first bear market in years and could fall further. It could also hang out at it current levels and t will eventually go up. The long term investor will win and like most drops, we will probably look back at this one and consider it another blip on a 10 year chart.