According to the weather forecast this year, it wasn’t supposed to snow. But on Christmas Eve, while we were frosting sugar cookies, it started to snow unexpectedly.
I started to think about how this relates to what the stock market is doing right now. Many people have been talking about something like this happening, but no one knew when or how fast. And no one knows how long it will last or if it will be as bad as 2008.
If you have a lot in the stock market right now, seeing your investments lose value can be depressing. I’m going to put what is happening in context and give my perspective.
What is happening?
According to Yahoo Finance, during the last three months, we have seen a consistent drop in the S&P 500. We lost 20% in that time frame, and it looks like we might not be at the bottom yet. We started the year at $268.77 and are currently at $234.34. That is a YTD price drop of 13%. But given the dividend yield, the S&P 500 is still up by 4.65%. We’ve lost a lot of gains in a short period but still are positive for the year (at least for the S&P 500).
We have been in a strong bull market since 2008. Last year alone (2017) the S&P 500 earned 22%, which is a massive gain. Through the previous ten years, we averaged 14% each year. We can’t sustain these levels of return indefinitely. It also appears the Fed is not taking a cautious approach, given they raised interest rates four times this year, and are planning two more in 2019.
A lot of people feel the Fed caused what is happening. But maybe the Fed figured a recession is bound to happen and they want to increase interest rates ASAP to provide some margin, just in case they need to lower them again to help out the economy? I think they should have started raising interest rates earlier on, and at a much slower pace. I believe there is a good chance their actions are increasing the speed at which things are going down, at a time when the market sentiment has reached 2018 levels.
Should we be concerned?
If you are investing regularly in the stock market, you will be purchasing shares at lower amounts as things go down. So when the market does recover, your gains will increase; also known as dollar cost averaging. But if you have a lot in the market already, this is not going to give you much comfort as things continue to go down.
Considering I plan on heavily investing in the stock market in mid-2019, this is excellent timing for investing in the market (or so it appears). You don’t want to start buying at the top of the market. But it is futile to try to time the market; all you can do is get a rough sense of what the market is doing on a general level. And things are looking bearish at the moment.
The best thing you can do right now is to ride it out. You only lose money when you sell. Considering no one knows when the market will start to recover, if you try to sell now with the idea in re-entering the market when things are lower, you could miss a considerable part of the recovery.
As we know from recorded history, it is normal for the stock market to go through these cycles. And time tells us that the stock market will recover, eventually. When people are freaking out, we should be more excited to put money into the stock market.
If you are freaking out about what is happening to your investments, it might be time to think if your allocation accurately reflects your risk tolerance. It is easy to love our decisions when everything is going up. When things start to go down is when we can see our true tolerance for risk.
Being 35 years old and hoping to start heavily investing next year, my risk tolerance is high. It also helps that I have made some terrible decisions with cryptocurrencies, and am familiar with a free falling market (given my timing). I’m putting my faith in the 10-20 year stock market average to push through the down periods. Of course, time will tell if that stays true, and I may change my allocation. The best thing we can do is try to make smart decisions and educate ourselves as much as possible.
It might feel like we are going through a storm, but it is an excellent reminder to think about the things that ultimately matter. For me, it is Andrea, my two girls, our health and creating memories that will stay with us forever. Stock markets will go up and down, but as long as we are around people who love us, things will be alright. We might have to change plans and re-adjust our focus, but this storm will not last forever.
I hope you have a great holiday!
Based on the current market trend, are you freaking out about what is happening? How do you feel about your allocation at this stage?