To say that the first three months of the year 2020 have been turbulent is an understatement. The US stocks have closed the first quarter with the S&P 500 down 21% and the Dow Jones Industrial Average down 24%.
Is it time to panic and sell all my shares right now? Should I be buying up shares? What should I do?
These are complicated questions, and there are still many unknowns. Will the global pandemic be contained and will the economy rebound? Or are we looking at a bear market (i.e. prolonged drops in stocks) for the next foreseeable future?
Do we know anything?
We now have over 100 years of history and data on the stock market. Here is what we do know based on that information.
The stock market goes in cycles. It goes up and it goes down, but the long-term direction is up. The average annual return of the US stock markets is between 9% and 11%. The key word here is “average”–this isn’t a guarantee year by year, but an overall trend over 10+ years, with ups and downs that level out to that figure.
The stock market was due for a downturn. At the beginning of 2020, the global stock markets had been rising for nearly 11 years, with market corrections here and there. It was the longest bull market (i.e. rising stock market) in history.
If you might need your money in the next 5-10 years, you shouldn’t be locking it in long-term investments. The stock market is a place to invest money, not save money. If you need your money handy and not lose its value, you should put your money into a savings account or other short-term and low risk financial assets (e.g. government bonds and treasury bills).
If you do have money invested and you haven’t sold anything up to now, and you don’t need the money away, I would keep things the way they are (unless you are rebalancing or putting it into something with more upside). You’d be locking in losses of 10% to 20% if you sell now.
If you have cash handy right now that you won’t need immediately in the next 5-10 years, you might want to think about investing that money. I think this is a reasonable time to buy stocks, bonds, ETFs, and/or funds if you’re a long-term investor, just as these.
How do I know it’s the best time to buy stocks?
No one is going to pick up the phone and call you the day that the markets hit the bottom. Markets move at incredible speeds, and they could be back up 10% or 50% before you have the guts to buy stocks.
Major market crises and downturns happen about every 10 years, and they can be a great opportunity to invest, as the world’s wealthiest people are finding right now. But what about for the non-billionaires?
In 2008, US stock markets dropped by more than 40% — the worst one-year drop in the 100+ years of stock market trading. This time, entire countries are on lock down due to a medical pandemic. It’s quite possible that the markets could drop by 50% or even more this year. Or, they could hang on at more or less this level until the end of the year. Or they could reverse and start rising again.
Yesterday, I asked someone “If you had your eye on a pair of heels and it was on sale for 30% off, would you go and buy it?” She said yes. I asked her if she’d kick herself if the price was marked down further to 50%. She said probably, but she’d still be happy that she got the heels on sale.
The “best time” to buy stocks isn’t the same for everyone because it depends on each person’s goals, cash reserves, and comfort level with risk.
We don’t know the future. This is why I’ve always advocated for investing in stocks consistently and over the long-term, rather than putting lump sums into individual stocks all at once. And facing a bear market requires a specific set of strategies, mindset, and know-how to take advantage of opportunities in the market while navigating the waves of volatility.
This is why I created the Bear Market Investing Package. Back in 2018, I knew we were due for a downturn in the stock market. The students in our 2019 private mentoring programs made significant returns when the markets dropped by 25% and then rallied up again by 35%, all within the span of the year. To find out more about our our next package offering in May, click here Private Mentoring Packages
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