We’re officially in a stock market correction, with major indices down 10% from their all-time high. This isn’t surprising. I’ve been waiting for a stock market correction for a few years. We’ve been climbing since the financial crisis, and an inevitability of markets is movement. What comes up, must eventually come down, only to rise again. But for those who are heavily invested in the stock market, what should we do?
Facetious I know, and not entirely correct, but the best thing you can do is put your head in the sand and stick to your plan. But wait, isn’t Satisfied Ghost all about confronting financial delusions head-on and gaining awareness of what is? Isn’t sticking our heads in the sand exactly against this teaching?
Let me tell you a story. In my early twenties, I liked to gamble. Small stakes and nothing more than I could lose, but I loved Twenty-One. If I was losing, I’d lose the amount I had set aside to lose (usually around $80 or $100) and then quit. No runs to the ATM. I’d keep careful track of this amount. But if I was winning, I’d squirrel away $5 chips into my pockets when I won a few hands and my pile was bigger than normal. I’d also do this if I hit a 21. In the pocket. No counting. No mental keeping track. I’d play with the $80 I originally cashed in. At the end of the night, I’d check my pockets and many times was very pleasantly surprised with my gains. I’d cash it in and go home with crisp, cool cash.
I tell you this to show that sometimes a lack of awareness is a good thing. A scarcity mindset gets a bum rap, and for good reason, but in some cases it can be your friend. Those $5s in my pocket could have pushed me into the land of abundance, where my bets got bigger and my losses (or gain) more steep. I kept my risk low by ignoring my gains.
We are entering a period of stock and bond market volatility. Rates are rising, which means bond prices will fall. As rates rise, money may leave the equity markets for bonds. I see inflation coming, given recent wage hikes, the oddly timed tax cuts and demographic trends. While headlines like this are meant to scare you, it is true that we’re entering a strange time for markets where volatility will most certainly stay present.
My investing advice
So my advice is not count those $5s in your pocket. Much of your recent stock market gains have been wiped out. But if you’ve been saving for any length of time, even just a year, you’re playing with house money. As this chart shows, the recent fall in the S&P takes us back to virtually the same level as just three months ago.
Set an amount you absolutely can’t lose, like my $80, and put it in cash or a short term bond. This will probably be enough to cover expenses for six months or so, depending on your risk tolerance. Too much cash is risky as well, given my thoughts on future inflation.
Remember: no one knows anything. I don’t think we’re heading for a bear market, at least this year, because earnings are good, and we don’t seem to be on the edge of a recession. But then again, no one knows anything. DQYDJ has an excellent article on what to do during a correction which stresses not being emotional in times of wide swings. Also keep in mind that while the point drops recently have been large, the percentages have not, given the indices are so much higher than ever. Remember fear sells.
What to do
- Stay invested. Don’t get panicked and sell. During 2008 and 2009, I quit checking my account balances and just lived by life. I never sold and have seen my net worth climb since the lows.
- Keep investing. Hopefully you’re paying yourself first, and investing every month into tax-deferred or other savings. Just keep it up and you’ll enjoy the new lower prices.
- Keep working. This may rub some of my fellow early retirement pals the wrong way, but for me at least, I’m doing more paid work than I had planned and am happy I am. It means I’m not touching my investments and not under a “sequence of returns risk” that can be devastating if you’re retiring. If you have the choice, you may want to keep working.
- Be frugal. Let the volatility keep you from making big purchases. Get more out of what you have. Be extra mindful of what you spend and keep your lifestyle simple.
Don’t panic. Train your attention to other things in your life: your health, your mindfulness practice, your family, a new hobby. Life is usually good and getting better, despite the balance in your account. Hopefully in a few years, you may be presently surprised by all the $5s in your pocket.
How are you handling the recent market volatility?