Have you been following the news in the financial markets lately? If so, then you’ve probably read stories like this one that say the stock market is due to have a correction or crash anytime now.
I get it. Headlines generate excitement, fear and traffic for the websites. However, these stories predicting a long term bull market, an impending correction or stock market crash should largely be ignored.
The problem is, I constantly see stories predicting the next market downturn. I bet you do, too. Unfortunately, most people don’t stick to their investment plans and eventually give in and listen to these crazy people. Why? Because if you hear something enough, you begin to believe it is true.
So, why do these stories not matter? Why should you ignore them?
If The Stock Market Dropped 50% Tomorrow It Wouldn’t Affect My Strategy
If stocks plummeted tomorrow it wouldn’t affect my strategy and it shouldn’t affect your strategy either. Why? Because you should have your investments set up in a way that matches your risk tolerance. If you’d sell your investments if your portfolio went down 50%, then your investments shouldn’t be 100% in stocks.
Think of it this way, if you had only 50% of your portfolio in stocks and stocks went down 50%, your total portfolio would only go down 25% if nothing else changed. If you only had 10% of your portfolio in stocks, your total portfolio would only go down 5%. However, if you had 100% of your portfolio in stocks, your total portfolio would drop by the whole 50%.
You should have your investment portfolio set up so that you won’t likely experience losses that go beyond the pain point that would make you deviate from your investment strategy. If you do this, then short term stock drops won’t matter. All that matters is the long run.
What The Stock Market Does In The Short Run Is Irrelevant
I’m a long term investor and my retirement is decades away. While no one can predict the future, history has shown that whenever stock prices as a investment class go down, they eventually recover over time.
Due to the fact I’m a long term investor, I have options short term investors don’t. Whenever stocks drop I look at it as an opportunity to buy more shares on sale because in the long run, stocks have always recovered.
Why would long term investors be scared of a drop in stock prices when in reality stocks are just on sale? In fact, I might even put more money in the stock market if it drops 50% in a short period of time.
Your Short Term Money Should Not Be In The Stock Market
The real reason why what the stock market does in the short run is irrelevant is the fact that you shouldn’t have your short term money invested in the stock market. We do know that historically that the stock market can crash and a significant amount of wealth can disappear in a short time period.
For that reason, never lock up money in the stock market you can’t afford to wait to withdraw. If you keep enough money in cash or other less volatile assets to hold you over until the stock market recovers, it will be much easier to ride the roller coaster.
Since I already have my short term money, my emergency fund, I don’t have to worry about my long term investments. If they crash 50% tomorrow, I wouldn’t care and you shouldn’t either. Have the right asset allocation and stick to your investment strategy and you’ll be doing much better than the average American investor.
Do you freak out when the stock market crashes? Do you change your investment strategy? Or do you stick it out and wait for the markets to recover? I’d love to hear your real life experiences!
Image by: Fakelvis Text added by: Lance Cothern