Declines in the stock market stink. When you see your family's retirement, college money like a 529, or money for another important goal decline, you have every right to be disappointed. You can't control the markets, but you can control how you and your spouse react. Keep reading for some common mistakes families make during bear markets and what to do instead for your family's investing.
Markets Going Down is Not Preferred, but it is Normal
Despite our best efforts, our children catch colds in the wintertime. No one wants that. We make our best effort to avoid a cold entering our households, but ultimately, it’s normal.
We don’t want the stock market to go down. Declines are, to an extent, normal and to be expected. If we look at a proxy for the stock market like the S&P 500 over past decades, we see about 3 out of 4 years are up years. That’s positive and helps grow money for your family over time. That leaves roughly 1 out of 4 years that have historically been down. The ups and downs are not preferred but are to be expected, at times.
What is a Bear Market?
You might have heard the term “bear market” before. The term is generally described as when the stock market declines by 20% or more. The exact percentage decline and how long until things go back up are different every time. Looking back, some have been short at a couple of months while other bear markets have last a couple of years. The future can always hold something different, but the past can inform our response.
Where Does the Name “Bear” Come From?
Bears and bulls may seem like two unrelated animals to associate with investments. However, the correlation between these two can actually be traced back to the late 1500s. During this time, people enjoyed gambling on bull- and bear-baiting - an activity in which the animal would be chained to a post and spectators would bet on which dog could kill it.
In the 1600s, it was common for hunters across America to actually sell bearskins before they caught a bear (similar to short sellers in the market) - further associating these animals with investments. In the 1700s, the phrases bull and bear market were published in “Every Man His Own Broker,” by Thomas Mortimer, and in 1873 a painting of the stock market crash by William Holbrook Beard depicted the two animals prominently.
The Enormous Investing Mistake Families Make During Bad Markets
Your Phone is Not Your Friend
Your phone is not built to help you make wise financial decisions for your family. You can check current events like the stock market from anywhere. Avoid the temptation. Prune your notifications too. Financial apps that offer notifications for fraud avoidance are helpful but turn off notifications about financial markets. In fact, studies have shown that frequent investment checkers on phones tend to do worse than the other investors. Resist the temptation to check your account balances too often.
It’s a completely natural instinct to sell when markets are declining. It’s also rarely the right thing to do. If I asked a room full of people if making an important financial decision based on emotion was a good idea, nearly everyone would say no. In the moment, it’s easy for emotions or even panic to overtake us. If you make a decision to change an investment for your family, that decision should be rooted more about what’s right for you than on what’s going on in the world.
"For you yourselves know how you ought to imitate us, because we were not idle when we were with you, nor did we eat anyone's bread without paying for it, but with toil and labor we worked night and day, that we might not be a burden to any of you." 2 Thessalonians 3:7-8 ESV
Trying to Time the Market
Many households respond to a market decline with a similar plan. They set out to sell and then buy later. The thesis many subscribers of this approach take is they’ll “get back in” when things are better. This raises several questions:
- How do you know when the time is right?
- What happens if you get it wrong?
- How long will you wait it out?
- How confident are you in your ability to predict the future?
The reality is this approach, often dubbed “market timing”, rarely works. My experience working with investors along with countless studies show that households who take this path overwhelmingly tend to do worse than investors who remain invested over the long term.
Stop Contributing to Your 401k
Some folks, in response to a market decline, reduce or stop contributing to their 401k at work. This response is common, but rarely the best choice. If the stock market is down your regular paycheck deduction buys at lower prices. Is there any other context where buying at a lower price is a disappointment to you? If your employer offers a 401k match, you could also miss out on an awesome benefit. Beyond just investments, don’t forget your 401k can help your family pay lower taxes. Credits and deductions are both possible advantages you could miss out on with a paused paycheck deduction. Savers who keep a steady contribution percentage over time tend to get better long-term results than the alternative.
Stop Contributing to Your Kids’ Education
Similar to your retirements savings, don’t abandon regular contributions for your children’s education. If your family is contributing to something like a 529 to pay for college, keep it up. You’re in a marathon and steady savers tend to get better results. That means more money to keep your son or daughter out of the student loan racket.
An important component of investing is balance and diversification. During times of market declines, what was once a balanced portfolio can become tilted too far in one direction or another. Occasional rebalancing among different investments, funds, or ETFs can bring your plan back in line. If you don’t want to worry about tasks like this, there are options available that will take care of this for you automatically or you can consider whether engaging with a professional who could help as well.
It is unsettling to see your family’s hard earned money decline in value. You don’t have to like it but avoid the above mistakes so you can avoid making it worse or missing out on an eventual recovery. Focus on what you can control and over the long term your investments can help your family for years to come.
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