Scared? You shouldn’t be. Yes, the market will crash, and no it won’t be the end of your world. And just to further de-stigmatize this event, let’s call it a market “correction.” I want you to fully understand this concept so I used this common misunderstanding as the basis of my latest Indy Star column.
“Stock market corrections are pretty scary for individual investors. The corrections are esoteric, emotional, and sometimes involuntarily educational. The natural feelings that an investor experiences during a market correction are justified, but almost always counterproductive.” (courtesy of the Indy Star)
Since corrections are so emotional, people tend to react less rationally. Meaning they neglect to follow the first rule of investing, ‘buy low and sell high.’ You get nervous and you cash out. It may make you feel better in the moment, but what you actually did was a rookie mistake. Novice investors are known to sell low and buy high.
So why am I asserting that a stock market correction isn’t a bad thing? Because math and history say so.
“In 2008, if you had a $1 million portfolio which consisted of only the S&P 500, the value of your portfolio would have dipped a stiffening $370,000. Did you notice I didn’t say ‘you lost $370,000’? You only lost $370,000 if you freaked out and sold your investments when things got bad. Arguably, some people had to sell. Some people were so misallocated heading toward a finite retirement goal, that they felt compelled to abandon ship before things got worse. The market did get worse, until the first week of March 9, 2009. And what has happened since then is only the fourth longest bull market (winning streak) in history. If you stayed in the S&P 500 during the turmoil, your $1 million portfolio would have been worth $1,437.361 on December 31, 2013.” (courtesy of the Indy Star)
While the math is obvious, it doesn’t mean you are going to be any less emotional about your money when the time comes. In order to protect yourself from a freak out, keep a balanced portfolio. Like I said, the market will correct at some point, but if you have a balanced portfolio you will survive any fluctuations in the market.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.