Should I pull out of the stock market? The short answer is almost always no. Dips are part of daily noise. Bear markets are common. You will experience multiple recessions in your lifetime. Crashes and depressions happen.
However, the fact that you are worried enough to ask might mean that now is a good chance to take stock in your investment strategy.
Are you diversified?
Periodically, it is worth taking a moment to review what you are invested in. While individuals stocks can go bankrupt and be worthless, it is difficult to imagine any scenario where the entire large-cap sector of the United States economy goes bankrupt. It is even more impossible to imagine every large-cap sector of all the free countries of the world going bankrupt.
There is no such thing as “over-diversification.” Diversification is a staple of financial advice for a reason. Don’t put all your eggs in one basket because if you drop the basket you won’t have any eggs. In the same way, don’t put all your assets in one company stock because if that company doesn’t perform well you might have jeopardized your financial needs.
Diversification is responsible. It is the difference between being willing to break every bone in your body as an Olympic skier and safely skiing with friends. As David Marotta writes:
Even if you have the risk profile of an Olympic skier that doesn’t mean you need to have a do or die investment portfolio. When it comes to money, every investor should avoid the three cardinal investment sins: fear, greed, and pride. Fear keeps you off the slopes, greed makes you ski faster than is safe, and pride makes you risk everything in order to get a place on the podium.
If your portfolio is highly concentrated, work out a methodical strategy to diversify your holdings.
Are your upcoming needs invested for stability?
If you are investing in the stock market the money you need to live on in the near future, then you might be investing too much. If you have withdrawal needs, you should take the time to ensure your stability allocation is set properly.
Investors should have at least five to seven years of their withdrawal rate allocated to stability (short money, U.S. bonds, and foreign bonds). Replenishing this allocation to stability when stocks are appreciating helps secure future years of spending.
Unfortunately, pulling out of stocks while they are down to create a stability allocation will likely hurt you more. To avoid pulling out of the markets when stocks are down, delay the adjustment of your asset allocation. If the markets are making your stomach churn now, schedule increasing your stability a year from now. After waiting a year, start adding to your Stability allocation regardless of what the market is doing after a year. In between then and now, don’t peek.
Is your job secure?
If you don’t have withdrawal needs, the next item to look at is your job security. Are you working in a field that may collapse or for an employer who may fire you?
If your job is secure, your paycheck acts as your stability allocation and helps ensure you are able to keep your eyes on the horizon during the storms.
However, if your job is insecure, it might help for you to take steps to plan on what you’ll do if you lose work. Our article “How to Budget for a Pay Cut” has lots of ideas on the topic. Ideally, you should set your budget based on only the wages you receive which you can reasonably count on always having (even if you would get those wages by getting another job).
This advice may result in your family living a more frugal lifestyle than is strictly necessary, but a frugal lifestyle is the most important component to building significant wealth.
Are you saving enough?
If you are nervous about the returns of the stock market, focus on what you can control. Saving more gives you the best chance of reaching your retirement goals.
There are two reasons that you are able to retire earlier when you save and invest more.
Second, when you save more, it means that you spend less. If your salary stays at $50,000 but you increase your savings from 0.2% to 1%, it means that you had to decrease your lifestyle from $49,900 to $49,500. This decrease in your lifestyle spending, assuming that it is a permanent decrease, means that you don’t need as much in order to retire.
This is why one of the best ways to ensure that you are on track for your retirement is to lower your spending and increase your savings.
Do you have cash waiting to invest?
Sometimes is can be scary to invest, and investors let large cash balances build up on the sidelines waiting to be invested until “things look better.” However, pulling out when things look bad and investing only when things look good is how you end up buying high and selling low. It’s like going shopping only when there isn’t a sale and avoiding the stores when everything is discounted.
It is always a good time to have a balanced portfolio. If your fear is getting in the way of getting started, perhaps it is time to automate your investing so you can distance your emotions or hire a financial professional who can help you be a contrarian of the markets. Continuing to invest your savings and buying on a consistent schedule regardless of what the market is doing is a wealth-generating mindset.
Are you emotional?
Take several deep breaths and consider yourself. What do you fear will happen specifically? Why does that scare you so much? If that happens, what will you do? Take this as an opportunity to heal yourself, better understand what your money means to you, strengthen your life plan, and plan for emergencies.
Long-term investors have time to recover. You can do this. If you don’t want to do it alone, this might be the time to reach out for help. Feel free to drop us a message or give us a call to get started today.
Photo by Kevin Blanzy from Pexels