Half of an entire generation has come of age since the last bear market. Here's a reminder of the inevitability of market cycles, and why the occasional selloff isn't such a bad thing.
If you’re in your 20s or 30s, you might have only been in high school or college the last time the market cratered this way (during the 2008-09 financial crisis). You were a child in 2001 when the September 11 attacks rocked the markets. And you might have been a baby or not born yet when the stock market took a 20% one-day dive in the fall of 1987.
In other words, you’re probably used to a market that, despite a hitch now and then, has spent most of your adult life cruising higher without much of a pause. If you’re an older investor, but one who’s relatively new to watching the markets, you might have a similar perspective. So that means when things crater on Wall Street, it can leave you feeling confused, unhappy, worried, and concerned.
Welcome to the club. Even seasoned investors who were around to experience all those events couldn’t be blamed for feeling unsteady after a period like we experienced in late February-early March 2020. It certainly doesn’t make anyone want to look at their retirement balance.
Beyond simply saying, “Stay the course,” or “This too shall pass,”—phrases you’ve probably heard a lot of during the volatile start to 2020—what are some ways that you as a young investor or someone new to investing can get through this market crisis without throwing your hands up and simply hiding money under the mattress?
If recent volatility left you feeling a little emptier in the wallet, here are five things to consider as a young investor or someone who only recently began investing. They won’t help you retrieve any lost gains (and investing is never guaranteed to do that, by the way), but they may help you gain some perspective and hopefully reinforce your faith that investing in the markets is something that can continue to be part of your playbook going forward.
No one is trying to deny the pain investors, including young investors, feel at times following market crises like the coronavirus-related one in 2020. Nearly five months’ worth of market gains got stripped away in just a week.
On the other hand, what looks really bad when you’re in the middle of it isn’t necessarily so horrible when you take a broader view. One way to look at things is to ask yourself, are you much worse off in your investments than you were last October? That’s roughly the last time major indices were at these levels, and most of us weren’t running for the exits then. The market might be down double-digits from its highs, but it’s even with five months ago.
You might be tired of older people or more seasoned investors telling you they had it worse, but in this case they did. For instance, in March 2009, the market descended to 12-year lows. Compared to that, a five-month low seems kind of puny.
Another thing to keep in mind is that even after the February losses, the market was still up about 27% over the last three years. Break it down and you have 9% yearly gains, which is about the average for the last 100 years according to Standard & Poor’s. And while 9% lags the S&P 500 Index (SPX) performance for some recent years, like 2019 or 2017, it’s certainly a nice return compared with what you’d typically get if you kept your investments in fixed income or cash.
“If you’re an investor with 401(k)s and long-term positions, this is a blip on the radar,” said JJ Kinahan, chief market strategist, TD Ameritrade. “If you’re nervous, look how you’ve done for the last two to three years.”
Everyone likes to think time is on their side, but if that’s true for anyone, it’s most accurate for those of us who are young.
Consider this: If you’re 30, you’re likely to be more than 30 years away from retirement. A lot can happen in 30 years, good and bad, for the markets. No one can say for sure that the future will be like the past. But with any luck, you have a lot more future than the rest of us, so that could potentially play to your advantage.
The median retirement balance for someone in their 30’s is well under $50,000, or about one-quarter the median for people nearing retirement. That means the power of compound returns might be one advantage you enjoy.
Compounding has been called the eighth wonder of the world. But really, it’s just simple math. Suppose you have $1,000 earning 5% per year. That’s $50 per year at first. But then it starts to compound. After that first year at 5%, you now have $1,050. Add the same 5% return and you get $52.50 the second year for a total of $1,102.50. The third year your total grows to $1,157.63 ($1,102.50 x 1.05).
The extra gains over and above the original $50 are small at first, but they pick up steam as time goes on. Change $1,000 to $50,000, which many middle-aged investors have in their 401(k) accounts even after this rocky start to 2020, and you could be talking about some real potential. Granted, this exercise doesn’t tell the whole story—returns in the real world are more complicated than the fixed-return example above, but it’s the same general idea.
For a younger investor who holds on now and sticks with the market despite this dramatic plunge, compound interest might end up being your friend, assuming the market overcomes this bump in the road. The earlier you start investing, the more compounding can potentially work in your favor.
You hopefully have many years of investing ahead, unlike older people who will soon want to start using the retirement funds they built up. So it may sound strange, but consider yourself lucky.
We started off by talking about the market scares of 2008, 2001, and 1987 and how this time compares. Getting back to that theme, it’s important to remember a lesson from those past crises: Fear doesn’t tend to be a good investment strategy.
A young investor (or any investor, for that matter) who got scared and put all their money into cash after the market plunged 40% in a few months back in 2008/2009 missed out on the compounded returns they would have gained over the next 10 years of market rally, while those who stuck to their guns likely ended up in better shape.
That doesn’t mean a 10-year rally is necessarily going to happen again. It only means that over time, stocks have tended to reward those who stayed in the market through thick and thin.
While it’s good to have a healthy level of respect for the markets when you invest your money, and to remember that despite your best-laid plans you can sometimes get smacked, it’s also important to not let that rattle your investment strategy. Unless you truly think the U.S. economy has stopped growing for good, it’s hard to justify not putting at least some of your savings into the market.
Most financial professionals suggest the younger you are, the more your investments should tilt toward stocks over fixed income, simply because you have more time to slog through these tough times and to enjoy what have historically been far longer periods of gain. Of course, this is general advice, and may or may not be right for you as an individual investor because a lot depends on your exact age, the time horizon you're looking to invest over, and your personal risk tolerance.
Many of us probably wish we’d missed out on recent losses. Those in the market during the coronavirus crisis of 2020, for instance, would probably appreciate a time machine back to Feb. 19, before the selloff began, so they could take some profit at that peak.
The problem is, Albert Einstein was right. You can’t go back in time. You can only move forward. And when it comes to missing out, it’s those who fail to invest or who make big shifts in and out of different sectors and asset classes without careful planning who tend to miss the biggest advances.
“Missing just a handful of days can sometimes turn hard-earned gains into losses,” said Keith Denerstein, director of guidance product management at TD Ameritrade. “This is why some investors conclude that the prudent thing to do is stay invested.”
For example, if an investor had moved in and out of stocks over the years and managed to miss the best 30 days of the stretch between the end of 2002 and the end of 2017, they would have lost money despite the fact that the market rose about 10% a year over that time span, according to research by Putnam.
That’s just 30 days out of thousands, but no one ever knows in advance which days the market is going to hit it big. If you’re not invested, those days might come and go with your money sitting on the sidelines.
President John F. Kennedy, in explaining the “Bay of Pigs” fiasco, told reporters, “Success has a thousand fathers, and failure is an orphan.”
Anyone who’s lived through decades of investing can probably tell you about the success they’ve had with their investments. Maybe they bought a basket of tech stocks in 2009 and watched them roll up gains for 10 years. Or maybe they got in early on a high-flyer such as Amazon (AMZN).
Few people want to talk about times like 2008 when putting money into stocks ended up being a very painful experience. The people who piled into a rallying market in 2006 and 2007 probably didn’t spend a lot of time bragging to their friends about how they got in just before things went haywire to the downside.
The takeaway is that investing has its ups and downs. As bad as the February 2020 meltdown was, it was just one of many that have and will happen in a typical investor’s lifetime. In fact, according to Marketwatch, last week didn’t even make it into the top-five worst weeks ever on Wall Street. The worst one was Oct. 10, 2008, when stocks fell more than 18% in one week. That’s almost a bear market (20% loss) in just five days!
Time can be a great healer. For those of us who lived through 1987, 2001, 2008, and other downturns, they now seem more like blips and less like big red alarms. When you’re in the middle of them is when it’s worst. Years later, the market has recovered every time it’s had one of these.
While there’s no guarantee that things will get back to where they were anytime soon, it’s unlikely that the scary market event you just experienced will be the one event that’s different from all those times in the past. Looking at the coronavirus in particular, if history offers any clues, viruses tend to pop up now and then, leave their mark, and then become controlled either through medication, vaccines, or just by burning out. This one could be different, but there’s no indication yet of that.
So strap in, consider sticking to your long-term plan, and maybe one day you can tell your grandchildren how you made it through the correction of 2020.