Everyone is an expert during good times. Many do it yourself investors spent the last decade investing in any one of many “can’t lose” opportunities. And with 10 years of strong market growth, the ‘can’t lose’ sentiment seemed accurate. For a lengthy period, it seemed like you could do no wrong putting your funds to work in your various brokerage accounts. Thanks to 10 years of economic strength, and various government stimulus programs, there was a plentiful amount of money available to invest.
But now it seems like it’s time for the world to pay up. Free money has led to inflation and a higher cost of living. Increased rates are ending the prolonged period of cheap money. And geopolitical events are making everyone skittish about everything.
For the last four months we have all watched our net worth shrink and our wallets tighten. Many people who thought they were an investment expert suddenly have run out of ideas of what they should do. And for an unfortunate many, what they will do will likely be wrong. A down market is not the time to be weak, or to be afraid. It is a time to have understanding. It’s during the down markets, not the bull markets, that fortunes can be made or lost.
Down markets are unavoidable characteristic of investing if you were to expect to have attractive long-term returns. Volatility is a variable of risk, and risk is necessary for growth. If you want to have years of 10% gains, you must expect and accept a few periods of 20% loses. Without volatility, an investment is simply a guaranteed product with a rate of return that barely outpaces inflation (think bank accounts).
Historically down markets are temporary, not the norm. Time seems to slow down when things are going bad. But like everything else, ‘this too shall pass’. Given a long enough period, the broad markets have always showed upward trends. The problem is that we have no idea when or for how long each period will be. But never let yourself think that tough times are permanent. If you planned correctly the short term will mean nothing to your financial security. These times will be long forgotten when you reach the point when need the funds for your future goals.
Down markets are opportunities. During times of a market decline, your investable funds go further, with greater purchasing power they may have had a brief time ago. Investing during down times will put you ahead once markets get back to even
It’s important to consider that these thoughts are very generalized. You need to account for your personal financial standing and financial goals to decide exactly how each point applies to you. The chore is to understand your long-term financial timeline and create a plan that allows you to enjoy the periods of prosperity and weather periods of tribulation.