Here we go again.
Britain’s vote to leave the European Union (known as Brexit) has caused quite the financial panic in markets worldwide. U.S. Stocks lost $1.4 trillion of market value on Friday and Monday. The FTSE 100, Britain’s main benchmark fell 5.6% in the first two trading days. Lawrence H. Summers, Former Secretary of the Treasury for President Clinton and the Director of the NEC for President Obama, called Brexit the worst shock since World War II.
Thankfully many are cautioning to take a breath and be patient. Those writers understand that this is what markets do. They go up; they go down. And instead of panicking, you should continue to think long-term and stay on track.
Know Your History
What I love about times like this is that they offer perspective. Remember when you said you weren’t afraid of taking risk with your investments? Well, here’s your chance to prove it. How do you feel now?
When I try to explain to clients, friends and even my husband that investing is a marathon, I use the Great Recession as a fresh memory of why you need to stay on the course and keep running.
On October 9, 2007, the Dow had reached a high of that time of 14,164.63, only to plummet to a low of 6,594 on March 5, 2009. (More perspective: The Dow closed at 17,409.72 yesterday). From that low in 2009, we saw a record high in 2015 of 18,312. (If you’re confused by what these numbers mean, read this and comeback.) Had you continued to invest the entire time, you would have made more money than you lost.
And it’s not just the Great Recession when this type of market mayhem has occurred. Manias have been happening for centuries! In his book, The Four Pillars of Investing, William Bernstein gives a fantastic history of market bubbles starting in the late 1600s and continuing through this century. The cycle has repeated itself and will continue to do so.
Your Shares are Still There
Have you ever wondered what you actually lose or gain when fluctuations like this occur?
Nothing.
You have the same amount of shares that you did previously. They are just worth less at the moment. So say you bought 10 shares of Mutual Fund A at $20 a share. You invested $200. Now let’s say that the value of Mutual Fund A rises to $30 a share. Your investment is now worth $300. If it subsequently plummets to $10 a share, you only have an investment worth $100.
The key thing to remember is that these values are theoretical until you sell Mutual Fund A. You will always have 10 shares. The price/share (determined mostly by supply and demand) at the time of sale determines how much you’ve gained or lost on the investment.
This fact is what makes selling in a down market so dangerous. In a time of steep decline, people get nervous and sell their riskier equity investments in exchange for safer investments like bonds or money market accounts. As such, they lock in their losses because they have not given an investment the chance to regain or increase its value.
Granted, they could be preventing a further loss if they invest in a stock or mutual fund that won’t ever recover (part of the danger of investing in individual stocks). But if you have a well-diversified portfolio and a long time horizon, your investments will have many ups and downs, and you will buy more and more shares at different prices.
Odds are you’ll never be able to time the market perfectly where you always buy low and sell high.
Stay the Course
Overall, investing in the market has provided a benefit to investors the majority of the time. However, you do significant damage to your portfolio if you miss even the smallest number of the best recovery days. Younger investors should rejoice that the money they contribute now will buy more than it has before. And older investors can take solace in the fact that they have scaled their asset allocations to something that isn’t as affected by the market’s current volatility.
So yes…take a breath. Also take stock of how this recent plunge has made you feel. There’s nothing wrong with fear or trepidation, as long as you can keep perspective and stay on the investing path that you intended.