I receive a daily email from the New York Times with a summary of the previous day's biggest stories. The subject for the Tuesday 06 August 2024 email: "Stock market chaos"; the opening sentence: "Yesterday was the worst day for U.S. stocks in nearly two years. Markets around the globe fell sharply; the S&P 500 index was down 3 percent."
That doom & gloom reminded me of this blog piece called "A Tale of Two Markets". I wrote it a few years ago so the quoted stock market prices are out-of-date, but the central idea still persists: there is no wrong time to invest your money, even when it seems like the worst possible time.
Listen, I get it. It hurts to watch your investment accounts drop. Research shows that people perceive loss as having about twice the impact of an equivalent gain.
But the headlines only tell you the bad news, and rarely with useful context.
Here's something the headlines never say: this is actually how it's supposed to happen. A stock market drop – even a severe one – isn't some anomaly that we should avoid at all costs. It's an ordinary part of the process. When there are more buyers than sellers, then prices go up; when there are more sellers than buyers, prices go down. That's it.
If there was no volatility in stock prices, then investment returns would be more like interest rates at banks. And, almost by definition, interest rates at banks cannot outpace inflation. Even though money in the bank is safe, it literally loses value every single year due to inflation. In other words, you cannot build wealth by only putting your money where there is no risk.
Here's something else the financial media doesn't cover: on average, markets go up more often than they go down. And the longer you stay invested, the more the odds are in your favor. But, because "incremental gains compounded over long periods of time" doesn't have the same emotional impact as "stock market chaos", it doesn't get talked about.
I'm writing this blurb on the morning of Wednesday 07 August 2024. Even though yesterday was the worst day for U.S. markets in 2 years, the S&P 500 is currently up about 11% for the year – about the historical annual average. Those "chaotic" one-day losses on Monday set the markets back to, let's see... the same level as early June of this year. Not quite as radically bad as it sounds.
So what should investors like you & I think when the investment markets take a sudden downturn? Here are a few suggestions that will make you a better investor – even in a bear market:
Remember that media exists to sell advertisements, not to help you make smarter decisions with money. Since we're not financial media personalities, we don't need to participate in the hype cycle every time there is a downturn.
Remember that the historic average return of the U.S. stock market – about 10% per year – includes all of the bad years. That means that the 10%-ish annual return includes the years where the market returns 21+% (like it did in 2023) and the years where it loses over 13% (like it did in 2022). It includes all of the volatility, including the painful stuff that grabs the headlines.
Remember that what happens today doesn't really change what you need your money to do over the next 10, 20, or 50 years. By choosing an investment strategy that fits your timeline and long-term goals – one that has both the good years & bad baked into its design – then sticking with it when the market drops, you will become a better investor than all the people who sell because of fear.
Let the markets do what they're going to do in the short-term. It's ok, even if it doesn't feel great. Because in the long-term, investing your money in the stock market is one of the most reliable ways to build the kind of wealth that can sustain you for the rest of your life.
Thanks,
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify your current strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.
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