When it comes to market rebounds, “Fear Of Missing Out” can be perfectly rational – and avoidable.
There’s a simple rule of gravity that every child learns: What goes up... must go down. Individual investments can be duds or winners but the market in general rebounds after down periods. Those investors who opt out before the rebound happens run a very real risk of missing out.
Since 1949, there have been a dozen bear markets, in which overall stock values have plummeted for a long enough period of time that some investors decided enough was enough and took their money out of the market. Some bear markets have lasted for more than a year. But each of those downturns more than made up for the damage with a “following bull”: a period of rising returns that lasted longer than the preceding bear market. On average, stock prices spend 49 months rising after each brief period of decline.1 No one can predict when a decline will end, and as financial advisors are fond of saying, “past performance does not guarantee future results.”
So how do you decide when to pull out and when to prepare for the rebound? Everyone’s situation is unique, but in general, it’s wiser to treat the stock market as a long-term source of returns rather than trying to time the market to maximize profits for every upswing and downturn. In other words, markets are volatile in the short term, but offer steady results in the long term. That volatility is nothing to take lightly; during the dot-com bust of the early 2000s, the S&P 500 lost nearly 50% of its value. It made that up during the next few years, but then in the Great Recession, lost an unheralded 57%. Yet overall, since 2000, the S&P 500 has risen by 147%. Even with those two historic setbacks, money you invested at the beginning of the millennium would have increased significantly.2
Value Can’t Buy a Cup of Coffee
Another way to think of this is that you don’t actually gain or lose any money in the stock market until you decide to sell your stock. You only gain or lose value of the stock. If outside circumstances force you to sell stock for one reason or another, that’s one thing. And, during a recession, certain individual stocks will not survive — that’s value that can’t ever be converted into dollars and cents.. By continuing to make new investments at the bottom of the market, it’s possible to make more on the rebound. That value can add up to real money when you need it. Of course, knowing when the market really reaches the bottom — or if it’s got further to fall — is virtually impossible.
One method for getting past the anxiety that comes with watching values rise and fall, and cushioning potential loss of value from a falling market while enjoying potential gains from a rebound, is to average out your investments. If you’ve got a certain amount set aside to invest today, don’t put it in the market all at once. Instead, invest a little bit this month, then an equal amount next month, then again the month after, averaging out your intended investment sum over 12 months. That way, you’re spreading out your risk of losing value over a longer period of time. You’re increasing your chances buying a solid stock at a bargain price. (Also, by taking your time, you’re giving yourself the opportunity to look closer at fundamentals and evaluate individual stocks and market segments.)
Declining markets happen. They’ve happened before and they’ll happen again. While there are no guarantees, some strategies have proved effective for dealing with downturns, and sometimes, a loss in value can actually equal an increase in opportunity. No matter what your situation is, a downturn is not a time for impulsive, unplanned action. It is a good time to check in with a financial advisor, talk openly about what you’re hoping for and what you’re anxious about, and review the right moves for your individual situation.