This is a perfect time to reflect on some Savage Truths that sadly must to be relearned in every economic and stock market cycle.
—Perspective is essential to investment success. And it’s almost impossible to gain perspective in the midst of a crisis. At the top of a bull market, everyone has forgotten about previous bear markets. And at the bottom, they’re too scared to invest. That’s as silly as believing that summer will never come because it’s cold and snowy in winter. The market and the economy move in cycles. Perspective is required!
—It’s not the “market” that matters. It’s your money that counts. The stock market only makes headlines at extremes. When every pundit has an opinion about where the market will go, remember they have a 50/50 chance of being right! If anyone actually knew for sure what was coming next, he or she wouldn’t be opining on TV.
And, it doesn’t matter if they are right or wrong because we can’t know for sure until we have hindsight. The real question is whether you can afford to keep believing them while your money melts away in a downturn.
The stock market doesn’t “care” about your money. The economists and commentators may have a longer term perspective, a stronger risk tolerance — or a lot more money — than you do! No one cares more about your money than you do! So the responsibility to make decisions is ultimately yours.
—Self-discipline is the essence of all decision making. Your investment strategy and your self-discipline are really tested when others are in panic mode. If you made a sound plan in calmer times, stick with it. If you have diversified and rebalanced, there’s no need to panic.
You’ll face two tough tests of self-discipline in a bear market. The first is to keep yourself from selling into a panic. And the second, equally tough decision is to stick to your pre-planned schedule of regular monthly investment contributions even though it seems like throwing money down the drain at the time. Of course, that applies to people at least five or ten years from retirement. Once you’ve stopped working you can’t take advantage of that opportunity to buy shares regularly at lower prices.
—It’s not wrong to be wrong; it’s only wrong to stay wrong. It’s not too late now to reassess your risk tolerance — if you can do so calmly. You’ve been advised before in this space to take some gains and set them aside in safe “chicken money” investments — especially if you’ve moved 10 years closer to retirement since the last bear market.
But pride goes before a fall. Don’t be stubborn or afraid to pull some money out — even when the averages are down 20 percent. Remember, many bear markets send the major indexes down nearly 50 percent. And in several instances in the past century, it took a decade for the market to recover from bear market losses.
—The lessons that cost the most teach the most. Unless you’re forced to sell because of a required minimum distribution or an emergency, you can ride out any decline. Remember, there has never been a 20-year period (going back to 1926) when you would have lost money in a diversified portfolio of large company American stocks, with dividends reinvested — even adjusted for inflation.
Over the long run — at least 20 years — holding a diversified stock market investment (the S&P 500 stock index fund) has been the wise course.
But riding out a long bear market will be a lesson you’ll never forget. Just make sure you actually have the long run and aren’t forced to sell prematurely to maintain your lifestyle.
One last thought: What if this time is different? Every bear market engenders that fear. What if the stock market never recovers? Investors asked themselves that in the Great Depression, during the decade-long bear market of the 1970s, during the energy crisis and double-digit inflation of the late 1970s and early ’80s, and after 9/11.
In every case, America has survived and prospered. And eventually the market has made new highs.
If it’s different this time, you’ll have a lot more to worry about than your stock portfolio. And that’s The Savage Truth!