2020 has been a wild ride for investors. In the first quarter, the S&P 500 fell hard and fast to bottom out at 30% off its peak high. And then, the index climbed uphill for 10 weeks to wipe away most of those losses -- even as COVID-19 still takes its toll on the health and economy of our nation. You'd breathe a sigh of relief, if only you weren't worried about ongoing recession and the possibility of another round of volatility.
It's natural to feel anxious about the prospect of your portfolio losing 10%, 20%, or 30% of its value for a second time this year. After all, you could see years' worth of savings disappear in a single bad trading day. The thought of it could have you losing sleep, second-guessing your investment decisions, and compulsively checking your portfolio daily, ready to sell off your mutual funds at the first sign of trouble.
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The thing is, you don't have to put yourself through that stress. Market conditions change quickly, and what's happening right now rarely makes or breaks your financial future. To help you refresh your mindset, here are five reasons why you don't need to worry about the state of the stock market.
1. The market has always recovered
Corrections, bear markets, and recessions aren't new creations of 2020. All of these have happened before, and the market has always recovered. Even the Great Recession of 2008 reversed its stock market losses within five years. And, more importantly, that bear market was followed by one of the most impressive bull markets in history. Between 2010 and the close of 2019, the large-cap index returned about 13.5% annually. That's higher than the index's lifetime average annual return of 10%.
2. You've only invested in funds you don't need immediately
You've heard it time and time again: Only invest in funds you won't need for at least five years. Following that advice means you don't have to worry about what's happening right now -- because you don't need to liquidate those assets anytime soon. A five-year timeline should be long enough to weather a recession today and hang on for the recovery that inevitably follows.
3. You care about long-term growth
Presumably, you're not day trading or otherwise trying to turn a quick profit in the stock market. Those activities are best reserved for gifted analysts who have ample funds to gamble.
The rest of us are better off with a more measured, buy-and-hold approach. If you are comfortable with the quality and risk level of your portfolio, then follow your game plan. It's not buy and sell, or buy and stress out. It's buy and hold.
Remember that you're holding for long-term appreciation. So, keep your focus on the future. Shifting your attention to the more granular view of what's happening today or this week isn't productive. It only reveals volatility, which can distract you from your plan.
4. You don't realize losses until you sell
Losses aren't set in stone until you sell. You know this if you resisted the urge to cash out when the market dove in the first quarter of this year. Your portfolio balance today might be close to where it was at the start of 2020, as if the wild sell-off in March had never happened.
5. Even with the volatility, the market's still your best option
The only way to avoid all bear markets and corrections is to hold your long-term savings in cash. But that's a tougher way to build wealth. The highest-yield CDs will pay you about 2%. At that rate, saving $500 monthly for 30 years would produce a balance of $247,273.
Alternatively, you could ride out market ups and downs to achieve average annual growth of 7%, which aligns with the market's long-term growth if you adjust for inflation. At 7%, your $500 monthly contribution would grow to $614,044. In other words, you make an extra $366,771 by having the fortitude to stay in the market.
Let it ride
As long as you don't need your invested funds today and you're comfortable with the positions you hold, look past short-term turbulence in the market. It's only a distraction that pulls your attention away from your long-term financial plan.
