I have seen numerous articles on the recent stock market decline.
The news media is in a frenzy claiming the end of the world is near, and that we’re all going to lose everything by the time it’s over.
It’s what much of the media does best: take an issue and sensationalize it to the point of terror. Or at least that’s what they like to do.
As you have probably guessed, I’m not a fan of theirs.
2008
I have a pretty steady hand when it comes to stock market declines. I rode out the collapse of 2008, investing cash into stocks all the way down.
I must admit that it was a pretty wild ride and even I questioned myself many times, wondering whether I was doing the right thing or not — buying when everyone else was selling. It was worsened by the fact that even when I thought the market could go no lower, it often did.
But doing making those moves ended up being a great move for me. Over the next several years, those investments skyrocketed and have done quite well. If you believe in the overall worth of US stocks (which I do), why panic when they drop a bit?
My Panic
This time was a bit different for me though. It wasn’t because my portfolio was down BIG TIME and my net worth had taken a huge hit (both of which were true). That’s what most people are afraid of (spurred by the media), but not me. I was panicked for an entirely different reason.
My problem was that I did not have any cash in my brokerage account! How could I buy when prices are falling (something I love to do) when I didn’t have cash? Ugh!
So I had to move money from a savings account to my checking account to Vanguard. Then it could be invested. But those moves took days — and I was panicked that I would miss my buying opportunity.
I did get some money to Vanguard and bought more of my favorite index fund. But as the market has started to go down more, I’m moving more money there as I write this. I hope I get it there in time to invest.
Good Thoughts
This whole set of issues like “what do I do?” and “where is the market going?” was put into great perspective by a couple pieces I’ve read recently. They are certainly worth sharing with you all. Let’s start with these quotes from The Simple Dollar:
The truth is that I see these kinds of short downturns as an opportunity. Right now, I can buy a share of Vanguard Total Stock Market Index for 9% less than what I would have paid for it three weeks ago. Since my focus isn’t on the return I’ll get this year or next year or even 10 years from now, all that I can really be confident about is the price at which I’m buying right now.
To sum it all up, for most people who aren’t on Wall Street or involved in day trading, the stock market should be a long-term investment, period.
My thoughts:
- I see downturns as a buying opportunity as well.
- My focus isn’t what happens in the next few years either, though perhaps it is within the next 10 years. I will need to adjust my investments in a few years or so as I glide into my financial freedom plan.
- The stock market is a LONG-TERM INVESTMENT. It goes up and it goes down on a day-in, day-out basis. Over the long term it goes up more than it goes down, but it’s not a straight uphill climb. Never has been.
The other set of thoughts comes from Jonathan Clements:
Currently, the S&P 500’s Shiller P/E is at 23.6, versus a 50-year average of 19.7. What would it take to get back to average historical valuations? We would need the S&P 500, which closed today at 1859, to fall to around 1550. That would put the index 17% below today’s level and 27% below its May 2015 peak. I’m not predicting we’ll get that sort of decline. But it does tell you that U.S. stocks aren’t exactly cheap.
Let’s start with the obvious: None of us has any control over the direction of stock prices or any real insight into where shares are headed next. The market will do as it pleases.
My advice: Calculate your current mix of stocks, bonds, cash investments and alternative investments, and compare it to your target portfolio weights. If you discover you’re taking more risk than you intended, this isn’t a good time to be selling stocks. Still, you might take that step if you’re truly uncomfortable with your portfolio’s risk level. For the rest of us, this is a time to carry on as usual. If you regularly invest part of your paycheck in the stock market, you should keep making those investments, and feel mildly pleased that you’re buying at slightly lower prices.
My thoughts:
- Though the market has gone down, it looks like it has more room to drop. Interesting.
- That said, NO ONE knows what the market is going to do. Especially the hyped-up mainstream media. So stop listening to them!
- Carry on. Sounds like good advice.
What I’m Doing
I do make regular stock investments into my 401k that will buy at the lower prices, but I will be supplementing these a bit with cash I had on the sidelines. I won’t get crazy though as I do need to maintain my emergency fund. Plus I’d like some available cash in case real estate drops again. I may want to pick up another rental or two.
Also, it may be a good time to pick up some high-yielding dividend stocks. I probably would but I haven’t yet sorted out my strategy on that subject yet.
How about you? What’s been your reaction to the market drop? What steps (if any) do you plan to take?
Coopersmith says
I was also caught off guard to this buying opportunity and a good one at that. However it goes agains my philosophy of not trying to time the market and being fully invested.
About a year ago I read an article talking about beta ratings. In its simplest explanation it is a rating that shows the volitility in comparison to the market. Total stock and total bond funds would have a rating of 1 which moves mostly with the market. Lower than 1 is less volatile and greater than 1 is more volatile when compaired to the market.
I am looking for alternatives to reduce the volatility of my portfolio without loading up on more bonds.Ishares has a whole section on there website that they talk about smart beta. I have started investing a small portion ( 2% of portfolio) into some of these funds to see how they operate in a volatile market and so far I am pleased. Seeing that they are perferred stock, dividend stock and minimal volatilitly type stocks they are down but not as much as an S&P 500. I expect growth but not as much as the market but similar to a dividend producing stock. The expense ratio is not bad for some of them (.15%) as I some in my 401k that have higher.
I have not been long enough into these funds to have any sort of opinion on growth but volatility is less.
ESI says
I’m not a market timer by nature either, but I do like me a sale. 🙂
L says
We dollar cost average and are against trying to beat the market….but my husband’s annual bonus came in on Friday, and we dumped the kit and kaboodle in to max out Roths and do our full annual budgeted contribution to daughters 529 on Friday night. Now we will redirect those monthly transfers to the mortgage for the rest of 2016. Hope it was a good move!
JimL says
With monthly systematic investments, like my regular 401k investments, I never think twice about the money going into the market, nor do I think much about changing my overall mix of 70/30 stock/bond allocation. However, I find myself playing mental games on large one-time events and how I invest those funds. I have about $250k coming in mid-March from my bonus and LTI and still have not come to a decision as to what I will do with the funds.
Coopersmith says
Yes that would be a dilemma. Maybe ESI readers could help give you ideas.
Mine would be to dollar cost average it into your portfolio but at a higher rate.
Aaron M. says
Due to the market correction, I have upped my contribution to my Roth IRA and 401K. In addition I’ve pulled cash out of my saving and dumped it into my high yield dividend motif investing account. If the markets stay down I will also dump my bonus and tax return into my dividend motif.
JayCeezy says
All fine thoughts, as long as one is continuing to work and/or have multiple income-streams.
For those of us now relying on our ‘nut’, there are a few things to note that prohibit the view of downturns as ‘opportunity’.
1) The annualized return for the S&P500 for the past 15 years is about 2.1%, 4% including dividends.
2) The Japanese Nikkei is at 45% of where it was 25 years ago. That’s before inflation.
3) The Federal Reserve kept a ZIRP (Zero Interest Rate Policy) for eight years, with rates artificially low to facilitate cheap borrowing costs and increase the velocity of money. Whether it helped, or just delayed the pain, that policy is ending. So the P/E ratios based on artificially cheap money are going to increase.
4) Commodities have been crushed. Gold down 30% over four years. Oil down 75% over ten years. Again, that’s before inflation. And before Iran’s supply comes to market.
So, for those like me trying to live off of the pile we accumulated during working years, this has been a very scary 10 years and I do not see a correlation between the real economy, the reported economy (i.e. unemployment and inflation rates), and the market economy (i.e. stock and real estate markets) which in times past has been used as a predictor for the future economy. This disconnect, and the unpredictable environment created by Federal Reserve actions, lack of correlated government revenue and expenditures, and the unfunded entitlement promises for U.S. citizens that are ignored by both citizens and politicians, limits my enthusiasm for equities.
If I had retired completely without a income stream from work, as I tried to do in 2006 with a NW of $2mm, I would have run out of money in 15 years due to the 57% 2008/9 S&P500 drop. Wishing everybody well, but sucker punches come without warning. I’m keeping my back to the wall.;-)
ESI says
You must be taking withdrawals from your principal, correct? Or are you just trying to live off the earnings of your investments?
JayCeezy says
Our ‘nut’ continues to grow, so far, in the three years my wife and I have been retired (2013 – 3.1%, 2014 – 4.2%, 2015 – 3.2%). This is year-over-year after all our expenses, including a new car and a few tens of thousands on home improvements. Our portfolio beta is 0.15, so pretty conservative. It doesn’t take much to live well, after primary residence is paid for. Our portfolio return is greater than our out-go, so far. Like I said, sucker punches…
If you click on my link (different from last time), you can find out more about how our cashflow plays out (our plan includes Social Security).
JK says
I have a similar story to yours. I moved money from savings to Vanguard money market to a fund, which took a few days, but “lucky” for me the downturn persisted. I’m currently between jobs so I need to be careful with my cash reserves, so this is probably all the “bargain shopping” I will do for now.
Unfortunately I have some options from my old employer that I need to exercise in the next handful of months. I was waiting until the year-end so I would take the income in 2016 – so that’s a big OUCH so far. . .
John B says
I think there is a lot of wisdom in your reaction to the market. I’ve never seen the chart pattern of a single day in the market ever repeat itself. I’ve often seen the market go up for the very same reason given by the experts that it goes down the next day. I hear so many brokers say that you’re playing with house money when you’re ahead which sounds much like gambling.
I left the market March of 2009 and made myself a promise to never put money in it again as it’s impossible to understand or rely on. I never lost any sleep but unless we have a credit crises as we did in 2008 i feel very safe with my present investments. I was up around 13% last year and i’m already up almost 1% so far this year.
Best of luck to anyone that likes gambling in the stock market. To me its far from investing.
Final thought, I totally agree with ESI’s comments on the press. They have never been about the truth. Their jobs are more about anything that will sell the paper or the newscast so they can earn their advertising dollars. Just look at singularly they focus on a catastrophy like a fire or hurricane. For days thats all you hear about until they’ve worn out their viewers in their attempt to sell advertising time.
Crystal says
Yeah, we took the sale opportunity and maxed out our Roth IRA’s for 2016 already. I may open a SEP 401k this year too…
DIY$ says
In addition to buying stocks, I also used the dip in the market as an opportunity to do my annual Roth Conversion. Because prices were down, I was able to convert more shares than if I had done it a few weeks earlier and have the same impact to my 2016 taxes. I’ve been doing a little bit of Roth converting each year and having a downturn at the beginning of the year was a perfect opportunity.