Pauses are good.
That forced halt in stock-market activity Monday, driven by coronavirus fears and a geopolitical fight over oil, happened, in part, to corral out-of-control algorithms and professional traders with wildly different goals from everyday investors like you.
But a break is helpful for the average investor, who has every reason to be scared by the goings-on.
So stop for a second, and take a deep breath. Then ask a question: Have your long-term goals changed today? If not, there is probably no reason for your investments to change either.
If you had stock investments in an account designated for a down payment on a home, a pending tuition bill or some other short-term goal, this is probably a painful moment. Hopefully, you can afford the losses, or maybe stocks will bounce back by the time you need the money.
Meanwhile, consider it a hard-earned lesson for next time: Be wary of making market wagers with money you might need in the next couple of years.
But if your stock-market money is for longer-term goals, this decline — scary as it is — isn’t a reason to do anything rash.
If you must look at what is happening, look at your net worth, including home equity. Consider refinancing your mortgage, given that rates are historically low.
And unless you have all your money in whatever stock index you’re checking (too often), your actual asset allocation may mean that the losses in your portfolio aren’t as bad as those flashing red numbers make it seem.
A Vanguard fund with 60% U.S. stocks and 40% U.S. bonds was down 3.2% on the year as of Friday’s market close. If you’re nearing retirement or just started it, perhaps your portfolio looks something like this. Hopefully this brings some comfort.
That Vanguard fund’s average annual return is 8.1% since its inception in 1992 — for people who did not try to trade in and out of scary market periods. That a balanced, steadfast investment strategy did that well ought to help your nerves too, even if we can’t truly know what the next 28 years will bring.
We do know, however, that stocks can fall by 10% or 20% or more in relatively quick fashion. It’s what markets do, at least sometimes. We’ve seen it before, in 1987, in 2001 and in 2008. And we’ll see it again after this passes. There’s always a next time.
Few people had the “spreading virus spooks markets and threatens economy” square on their global meltdown bingo card. We don’t know what will cause the next drop, either. So predictions are mostly useless, today and always.
But there are a couple things we know: Stocks have delivered decent gains over long periods of time to people who persist, and successful investors do not buy when prices are high and sell when they are low.
Nothing that is happening today changes that.