Why You Should Stay in Stocks Even When the Market's Falling
Fast forward to today, and the fear is still there. We start hearing about whether or not it's time to get out of the stock market, especially when the media seems to only report on bad things. If you're going through that mental exercise of whether or not you should jump ship, consider these reasons why you should stay the course.
The Media Does Not Know Your Situation
Members of the financial media have one job ... to get ratings. That's not bad, per se, but in their pursuit of that goal, they will tell you things like this:
- The sky is falling.
- There is much to be afraid about.
- Conditions are ripe for a pull-back.
Simply put, it's best to put the financial talking heads on mute.
You Will Lose Money by Jumping Out
I know it seems counterintuitive, but you will lose money by jumping out of the stock market due to fear. Going back to the emotional argument, the stock market runs on 90 percent emotion and 10 percent reason. It is doing what it should be doing -– going up and down.
Consider this. During the plummet in 2008, the S&P 500 (^GPSC) lost just over 38 percent of its value. Retail investors jumped out at various points of the downturn and might have saved themselves from some of those losses. However, many continued to stay out of the stock market after it hit bottom due to fear of losing more money. That makes sense on one level, but it's shortsighted. Those emotional investors (and thanks to fear, non-investors) missed out on the S&P 500 more than doubling from 2009 to 2013. Pulling out now, especially when you stay out long-term, is a recipe for losing money, not making it.
You Have a Goal That Needs Long-Term Commitment
Most of us have goals that require active investing. The stock market, whether we like it or not, is going to have these short-term blips. It is going to have day-to-day swings, and some swings might be wild. Jumping out when the market appears to be tumbling is not going to help you reach those long-term goals.
I know this can be difficult when you're seeing your retirement account balances go down. I deal with that myself, and I've spoken with thousands of investors who've dealt with the same thing. But we should not allow this fear to derail our investment plans. Instead, it should encourage us to keep our focus on what matters -– the long term and how we're going to reach our goals. That might mean making slight tweaks to your asset allocation or looking for opportunities to invest in, but overall, it means keeping a long-term vision that withstands the market's daily swings.
At the end of the day, the stock market is going to fluctuate. Success requires focusing on the big picture. If your desire is to grow long-term wealth, that will serve you much better than listening to any doomsday predictions.
John Schmoll is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. He is a father, husband, and veteran of the financial services industry who's passionate about helping people find freedom through frugality. He also writes about wise ways to manage your money at WiseDollar.org.