Stock Market Sell-Offs: What to Do

When you open your second quarter investment statements it is not going to be a pretty picture. In mid-June we officially fell into a bear market, as the value of the S&P 500 and other leading indexes have lost more than 20%.

I know how upsetting all of this can be. And when we are upset, we run the risk of making decisions driven by fear.

Please stop before you make any changes to your long-term investing strategy and hear me out.

My best advice for what to do in the midst of this bear market: stay calm.

I know staying calm is not exactly high on your list right now. When you see your account values falling it’s natural to think it might be better to sell everything and stop the bleeding.

But that would be a big mistake. If you get out now, you will have just set yourself up for a huge risk: being on the investing sidelines when the markets swing up.

As the saying goes, no one rings a bell to tell us when the worst is over. And if you miss just a few of the market’s great days, your portfolio’s returns will likely be a whole lot lower over the long-term than if you stayed invested.

Here’s why I want you to stay calm: over the past 20 years, the S&P 500 has had a 9.5% annualized gain. But if you missed just the 10 best trading days in that 20-year stretch your annualized gain would have been just 5.3%, according to J.P. Morgan Asset Management. If you missed the 30 best days your return would be less than 1% annualized.

What’s even crazier is that the best days have a habit of coming right on the heels of the worst days. Over those 20 years, seven of the 10 best days occurred within two weeks of the 10 worst trading days.

I hope that convinces you that bailing out is not a sound strategy. For your long-term investing goals, the smart decision is to just keep following your strategy. Keep making contributions to your 401k, 403b, or Individual Retirement Accounts (IRAs).

And don’t stop investing in stocks. Especially right now. For starters, lower stock prices mean you are essentially buying stocks on sale. Yes, they may become even cheaper in the coming weeks and months. We have no idea when this bear market will end. But the money you invest in stocks is not for the next weeks or months. It’s for years from now. With patience, stocks will recover.

Moreover, over the long-term (decades), stocks have been the best way to generate gains that exceed the rate of inflation. And we all know inflation is now front and center as a financial risk we all need to be extra smart in dealing with.

I also want you to give yourself the “perspective” talk whenever needed. Yes, stocks are in a bear market right now. But the five-year annualized gain for the S&P 500 is about 10% and the 10-year annualized gain is around 12% through the end of June. Going back 15 years—which includes the 2008 bear market, the March 2020 bear market, and the start of this one—the annualized gain is still a very strong 8%.

With the right perspective, I know you have what it takes to smartly navigate this bear market: patience.