If you are new to investing, there is a decent chance that you have seen almost nothing but gains. So what do you do when you see your 401(K) take a big hit?
Let’s start with some investment basics.
An important concept in investing is understand your time horizon. A time horizon is how soon are you going to use the money you have invested and how long will it have to grow. Anything with a time horizon over 10 years is considered a long-term investment.
The stock market goes up and down, but historically the stock market rebounds after a “correction” in an average of 4 months. (CNBC, “Here is how long stock market corrections last and how bad they can get”.)
A correction is defined by a drop in the market of less than 20%.
With a 15-year time horizon, a 4 month recovery period should be no sweat. If you are investing regularly, you will get to buy some shares at a discount until the price rebounds. Good for you! (This is known as dollar cost averaging)
What happens if we hit a bear market?
Bear markets are not fun. A bear market is defined by a drop in the market of 20% or more.
Since WWII, there have been 12 bear markets with an average decline of 30% over 14 months. These bear markets took 24 months to recover, on average.
2007 Bear Market
In 2007, I was newly divorced and just moved in to my first solo-owned new home. Between 2007 and 2009, the stock market dropped 57%.
Here I was, newly single, swearing off marriage, in the most debt I had ever been in, watching the money I diligently saved evaporate.
My stomach kind of hurts thinking about it. Here is how I handled it.
In retrospect, I did a few things right.
1. I went to my Oh-Shit budget because the world seemed to be going to hell in a handbasket. I was able to up my emergency fund.
2. I did not sell investments to try a “preserve” capital. I knew that markets rebounded, I knew that I had a lot of years until retirement and I could recoup the losses. If I had sold, I would have bought high and sold low – which is the opposite of winning.
3. I completely ignored my 401(k) balance and refused to look. It hurt too much. I also new I would panic, and that is not good for anyone.
What I did wrong
If I remember right, I either stopped contributing for a bit or cut way back on what I was contributing to my 401(k).
At the time, it seemed the comfortable thing to do. I can be risk averse when it comes to my money and I was afraid to risk any more.
Had I continued to buy when the market was going lower and lower I would have had some serious wealth built up when the market recovered 4 years later. I would have been buying investments at a 57% discount.
For example, $100 invested in the market in 2009 would be worth $715 today!
In conclusion
There are no guarantees in life – let alone the stock market. We are in weird times. However, if you want to look at the past for a guide the best course of action is likely NOTHING. Keep doing what you are doing. Keep socking away 20% of your income into your retirement (yes, I know). Do not let the stock market cause you to blink first. If you hold tight, you might get some really good deals and build some serious wealth.
Source: https://www.cnbc.com/2020/02/27/heres-how-long-stock-market-corrections-last-and-how-bad-they-can-get.html
Source: officialdata.org
If you are unsure of what to do, consult with a licensed financial planner.
If you want to learn about the basics of investing consider attending my event, Investment Basics for Women. Registration is under the Events Tab.