Thriving with Stocks—Is This Downturn Different?
The stock market has given us some especially volatile days lately. The war in Ukraine, interest rates, high inflation (and the supply chain issues that contributed to it), and speculation about mid-term elections have all been in the news.
Each story has the potential to move investment markets. When those moves are downward, we see the same breathless news stories we’ve seen in every other downturn. It’s a field day for doomsayers.
Is the news telling us anything we need to know about managing our savings and investments? Is this downturn different? And what do you do about it?
The answer is simple: you do the same thing you do when the market’s rising. Understand that nothing lasts forever (including falling stock markets) and stick to your plan. Sure, this market sell-off was sparked by several issues we haven’t seen in quite this combination before. But that’s true of every prolonged downturn—each is caused by unique specific circumstances. And the stock market inevitably recovers and goes on to create new record highs based on the same foundation that makes stock markets work in the first place.
Stocks are still long-term, news is still short-term.
News moves stock markets, and then amplifies itself by reporting on those very same stock market moves. But it shouldn’t move you.
Remember that the job of the news media isn’t to give you good financial guidance tailored to your situation. It’s to sell advertising. And bad news gets hyped because it’s good for sales (hence the disturbing editorial adage, “If it bleeds, it leads”). With news being pushed at us every second of every day, it’s the most short-term of viewpoints.
Stocks aren’t designed for the short term. They work in the long term, a period measured in years (not in months or days, and certainly not measured by the “This just in!” standard of scooping the journalistic competition).
Relying on the news for guidance on your investments is like fishing with a crescent wrench—it’s not just the wrong tool, it’s worse than useless.
Stocks are still best in the long run, and completely unpredictable in the short run.
Does the market react to news? Of course—that’s practically all it does. But for the long-term investor, that doesn’t matter. We expect stocks to continue to do what they’ve done for decades: provide notably better long-run returns than bonds, cash, or inflation, while behaving in the short-term something like an over-caffeinated ferret driving a racecar.
The stock market isn’t designed to provide short-term profit. Sure, there are people who try to make money quickly in stocks. But if they’re successful, there’s every reason to believe they’ve been lucky, not smart.
A long-term investor doesn’t have to rely on luck. They have a plan. The key is to stick to it, especially in times of uncertainty.
We believe in future record-high stock markets.
Look at every other stock market downturn in history. Every single one. The market as a whole has always recovered. Not each individual stock—that’s one reason we diversify—but stock markets cannot help but grow in the long run because businesses will continue to operate and make money.
Yes, the specific causes of the current downturn are as unique as those from every single downturn before. And stocks will come back and set new record highs just like they’ve done…
Every.
Single.
Time.
Before.
Succeeding with stocks when the market stinks
So, what should you do in this current stock market?
- Ignore the news. It’s short-term. Your stock funds are long-term. Don’t fish with a crescent wrench.
- Stop trying to predict what comes next. You’re a human being and cannot predict the future any more reliably than you’ve been able to before. And by admitting you can’t predict the future, you gain a tremendous advantage over those misguided souls who think prediction is the way to make money in stocks.
- Focus on what you can control—like your risk and costs, and your income tax strategy around your investments.
- Stick to your plan. Even a mediocre plan, executed decisively, is better than the best strategy that you abandon at the first sign of triumph or trouble.
We’ve been down this road before, and we remain very confident that stock markets will once again make many future record highs. That’s the job of stock markets: reliably outperforming bonds, cash, and inflation in the long run.
But to do that job it cannot help but be erratic in the short run. The trick is to remember to use the right tool for the job. For the short-run, that’s cash and bonds. If you make sure you have enough in those asset classes, that’s all it takes to be confident you have the time for the stock market’s inevitable—and inevitably unpredictable—recovery.
-Ken Robinson, CFP®
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