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Unless you’ve been sleeping under a rock the last month, you’ve probably noticed that the stock market has dropped a lot.
But what should you do about it?
In my head there are 3 options (let’s assume you’re 100% invested in S&P500):
1) Sell off your portfolio and turn into 100% cash
2) Hedging: Sell off eg. 10% of your portfolio and short it the other way –> you keep 90% in your index funds, while you use 10% to invest in a bear product (eg: S&P500 Bear x5). If the market falls 10%, your portfolio will decrease by only 4%.
3) Do nothing
If you’ve been reading this blog for a while you already know what I will do, I’ll stick with option 3.
Why The F*** Are You So Ignorant, Route 2 FI? You Have To Do Something!
Yes, I know how it feels to be in a bear market. It’s not a good feeling. Seeing your numbers decrease for every passing day.
Not to mention how fast and this stock market drop has been and the large volatility.
Look at the figure below, it shows the %-change from one day to the next during this volatile week.
This week acted out like this:
That’s not something you see every week.
My gut feeling tells me that this is only the start of a highly volatile market for the next couple of months.
So why the heck don’t I do something about it?
Why do I accept this volatility? And is it possible for me to “escape” it?
First of all, I don’t believe in market timing. You may be lucky making it once. But to time the market perfectly you have to be lucky twice.
Let me explain.
You have to get out of the market before a crash, but you also have to get into the market at the bottom.
That’s simply not possible in the long run.
If you don’t believe me, why don’t you just try this “Market Timing Game” by Engaging Data.
And send me a screenshot of how many times you successfully managed to time the market here.
Don’t Fear Paper Losses While You’re Young
Secondly, what’s so bad being in a recession if you’re young like me?
Remember that I have the exact same number of shares today, than 3 weeks ago before the “crash”.
What people tends to forget is that their money is disappearing, but they’re not.
It’s the value of the stock that fluctates, not the number of shares.
And if you’re like me (planning to keep your shares indefinitely), you should embrace stock market crashes early on.
Because this means that your favorite stocks are on sale. That’s right. You get more stocks to a lower price.
If you’re planning to buy more stocks every month for the next 5, 10, 20, 30 years, you should just sit still in that boat.
You’ve got all the time in the world for the market to recover.
I’m sure you’ve heard the statement “You should be aware of large drawdowns, maybe you’ll never recover!”
And I’m sure you’ve seen this figure below as well.
If you drawdown 20%, you have to gain 25% to get back, if you’re down 50%, you have to gain 100% to get back etc.
While that is true in theory, it may not be that scary in reality.
Let’s do an example: You have a portfolio of $300,000 and you invest $3,000 every month.
Let’s assume further that the stock market crashed and dropped down 50%.
You now have $150,000 left in your portfolio and you continue to invest $3,000 every month.
After the crash we’ll expect the markets to increase by 10% annually.
Do you need a 100% gain to get back to $300,000 if you keep investing monthly ? NO!
After 1 year –> portfolio value: $203,400 (interest: $17,400 + $36,000 invested yearly)
After 2 years –> portfolio value: $262,400 (interest: $23,000 + $36,000 invested yearly)
After 3 years –> portfolio value: $327,600 (interest: $29,200 + $36,000 invested yearly)
For you to get back to your old ATH you need less than a 30% gain over a 3 year period. The reason is that most of the money comes from your salary.
As I’m sure you’re aware of already, this is only me playing around with the numbers. My point is that for young investor with 20-30++ years left in the game, there’s no need to be worried.
You should only be worried if you need your money right now.
Because if you do, you have taken way too large risk.
This Too Shall Pass
But to end this with some good news. After some bad months the stock market most likely will return some nice gains for you in the future.
Look at these historical data from A Wealth of Common Sense:
The 1, 3 and 5 years forward performance after historically bad quarters shows that you’ll on average will be up respectively 25,5%, 37,9% and 91,3%.
That’s not so bad, is it?
Let’s ride this storm together.
If you survived last week in the stock market, you’ll most likely survive what’s coming next as well.
Have questions, comments or suggestions? I would love to help you with your FI-journey.
I made this 16-pages FREE workbook with the steps I’ve taken on my path to Financial Independence.
Having a goal written down with a set date for accomplishment gives you something to plan and work for.
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