Published in: Buying Stocks | April 16, 2020
How to Think Long Term When the Short Term is Scary
The current situation for investors doesn't have to be as scary or unusual as it seems.
Over the past couple of months, the U.S. stock market has hit an all-time high, plunged by more than 30% as the COVID-19 pandemic virtually shut down the economy, and then rebounded by about 20%. And during that time, market swings of 5% or more in either direction have seemed to be the rule, rather than the exception.
It certainly has been a scary time to be an investor. Obviously, nobody likes to see their retirement account value evaporate or watch their net worth jump up and down by thousands of dollars or more on a daily basis.
That said, in times like these, it's more important than ever to stay focused on the long term. I know that's easier said than done, so here's a quick guide to keeping your focus on long-term results in the midst of short-term uncertainty.
Make sure your short-term financial needs are met
The first thing to do in scary financial times is to make sure you can meet your needs for at least the next year or so. This means you have enough money from your income, emergency fund, savings accounts, and other sources to cover any near-term spending needs without having to tap into your retirement accounts, rack up credit card debt, etc.
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One question I'm commonly asked in both good and bad times is, "When is the right time to sell stocks?" And my answer is the same in recessions as well as in prosperous times: Sell stocks if you need the money within the next few years. If you don't, you're better off staying invested.
If you know you can meet your short-term needs, you'll find it much easier to focus on the long term. So, take a few minutes and ask yourself if you have any major expenses coming up and, if so, how you're going to pay for them.
Stop checking your 401(k) every day
Recently, a friend of mine called and said, "I don't know if I can take this -- one day last week, my 401(k) lost $25,000! The next day, it lost another $10,000. Then it was up by $20,000." My response: "Stop looking at your 401(k) every day."
Unless you're planning to retire within the next few years -- and if you are, you probably don't have a ton of stock market exposure -- there's no need to check your retirement accounts or other investments constantly. Doing so doesn't do any good. It causes unnecessary stress, and in many cases, it also leads to irrational, knee-jerk decisions, like moving your 401(k) assets into cash at the worst possible time.
This isn't the first market crash, nor is it the worst
Market crashes happen. It's a fact. Even after the coronavirus pandemic is over, the stock market will crash again someday before too long. It's not an if, but a when.
Additionally, although the stock market has fallen faster than it ever has before, the magnitude of the drop hasn't been too unusual. At its March 2020 low, the most the S&P 500 stock market index had declined from its previous peak was about 34%. Meanwhile, during the 2008–2009 financial crisis, the S&P lost more than 56% of its value.
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Here's a quick scenario that could help put things into perspective: Let's say that you invested $10,000 in an S&P 500 index fund at the absolute worst possible time in the past 20 years -- at the market's high point in October 2007, before the financial crisis hit. If you had done this, you would have seen more than half of your investment's value evaporate as the global financial system teetered on the brink of collapse. And you would have held on throughout the coronavirus crash.
Any guess how much your $10,000 would be worth today if you had invested in 2007 and held on through both market crashes? It may be hard to believe, but your investment would have grown to about $24,000.
Here's the point: Stock market crashes are scary, and they seem to happen every decade or so. I'm not quite 40 yet, and there have been four ugly market crashes so far in my lifetime. And the S&P 500 has increased by roughly 2,400% since I was born.
Even with all of the crashes and turbulent times, stocks remain the most certain path to wealth when you measure returns in decades. This too shall pass. And when it does, you'll be glad you stayed the course.
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