Worried About the Stock Market Decline?
January 22, 2016The first two weeks of 2016 have been horrible for the stock market. The Dow Jones Industrial Average lost 8.25% from 1/1 through 1/15. That is a bad year and it only took 2 weeks!
Famed investor Bill Gross warned that when the Fed raised rates, we might see a steep decline in the stock market. It looks like he was right. I’ve been saying for the last several years that GDP growth is lousy, corporate earnings look good because of expense control not top line revenue growth, and while the unemployment numbers coming out of DC look better – it’s not legit – the labor force participation rate (a much more telling statistic) show an economy that is very troubled.
The stock market boom of 2009-2015 was largely created by the Fed keeping rates near 0% and not because of our economy being in a full-fledged robust recovery. To me, it always felt like the stock market increase over the last 6-7 years was built on a very shaky foundation rather than reality. Sadly, the first two weeks of 2016 make my skepticism feel true.
So, what does that mean for the future and what can you do about this stock market decline? That depends on your timeline. First, you should have a handle on who you are as an investor. This Investor Risk Profile and Asset Allocation worksheet can help you determine who you are as an investor and help you find a range for an appropriate asset allocation. Then take a realistic look at how long you think you’re going to work full time before retiring and tapping into the money you’re investing.
If you are 15+ years away from retirement, celebrate this downturn. Have you ever gone into Target, looked at something you want to buy, notice that there’s a “25% Off” sticker and been unhappy? View market downturns the same way if you have time on your side.
You are buying funds in your 401(k) at a sale price! Celebrate that and root for more downturns…even bigger ones. In fact, if you can afford to increase your contribution level – this would be an awesome time to do that.
Let’s face it. Markets go up, markets go down, and historically you haven’t been able to beat (with cash or bonds or real estate) the long term (20+ years) returns in the stock market. Stay committed, stay invested, and make sure that your asset allocation is appropriate based on the risk profile worksheet above.
If you are under 15 years but more than 5, this is a wake-up call to revisit your asset allocation. Maybe you could move toward the lower end of the range for stocks in your portfolio rather than the high end if you’re a bit nervous about the market. But also take this opportunity to run a retirement estimator to see if you are on track to reach your retirement goals. If you can, increase your contribution so that you – like an Olympic figure skater – finish with a flourish. You won’t regret having more money available during retirement!
If you are within 5 years of retirement, you need to get VERY serious about whether your risk tolerance is appropriate for your timeline. If we have a very serious market downturn like we did in 2008, you may not have the time to recover the losses if you need to withdraw the funds for living expenses. That’s when the loss goes from a hypothetical loss on your statement to a real loss that can never be recovered. The stakes are much higher when the time frame is shorter.
One phrase that I use a lot when talking to employees of our client companies is “Emotions are the enemy of good decision making.” Yeah, it’s not exactly Shakespeare, but it’s true. That’s why it makes sense to wait 24 hours before sending an emotionally charged email.
It also makes sense to think about and reconsider your long term investment strategy/asset allocation before selling everything and moving into an all cash position, as one person I talked to today wanted to do. Those were his emotions talking. He is in his early 30s and had only seen good markets. This is the first time he’s ever seen his 401(k) quarterly statement have a loss on it. He panicked and was ready to exit the markets completely.
We talked about the market being cyclical, just like the economy, and that he will see probably 5-10 corrections/crashes in his career and just as many exuberant run-ups. The key is not getting too high or too low with the market. Emotional investors rarely make the right decisions.