J.S. from Warren County: With markets tanking, should I get out? Is a recession coming? I want to retire in a few years so I’m not sure what to do.
A: Times like these can test even the most seasoned investor. After all, no one likes seeing their investments drop in value – and the incessant headlines that use “tanking” and “plunging” aren’t helping matters – so we know that you may be feeling anxious and stressed right now. And what’s even more frustrating is that there isn’t really anywhere to hide; not only are stocks in the red for the year, but bonds are as well. So, we want to share some context and perspective with you, along with a few key reminders.
First, according to the most recent data in our Allworth Recession Index – and despite what you may be reading or hearing elsewhere – the risk of a recession is actually still low in the short term. This is partly because you, the consumer, are still financially healthy and because the labor market is still very tight. So that’s some good news. However… a recession will happen at some point because they’re a regular part of the economic cycle. And while we don’t mean to downplay the seriousness of a recession and the financial pain it can trigger, we do mean to say that we’re basically always headed towards one.
Second, let’s put some things in perspective. Yes, this year has been rough so far (especially for stocks). We officially hit “bear market” territory in the S&P 500 at one point last week, which means it had fallen at least 20 percent from its most recent high. But what if we told you that since January 1, 2020, the S&P 500 is still actually up more than 25 percent? Surprised? And this is despite a worldwide pandemic, the worst European land war in decades, and 40-year high inflation. (If anything, you could actually argue that the market has been quite resilient!) So, while we are experiencing short-term pain, it’s imperative not to miss the forest through the trees. And remember this: When we look at previous downturns and bear markets, they don’t last forever. The market has eventually recovered every time.
Third, we find it amusing that the stock market is the only “store” (so to speak) where customers panic and run the other way when things go on sale. Because while it’s tempting to want to “get out” right now, this is actually the worst time to do so since your losses are technically only on paper. Remember the old investing adage, “Buy low, sell high?” You would be doing the complete opposite. By selling low, you’re essentially locking in your losses. Plus, would you know when to get back in? Likely not. Many times, it’s impossible to tell when a bull market has begun until you’re already in it. (And as a reminder, bull markets tend to be more powerful than bear markets.)
Finally, keep in mind that market losses are sometimes just unavoidable. But if you have a financial plan built to match your goals, needs, and appetite for risk, you’ll be much better positioned to weather these kinds of storms moving forward. Because remember, your investments not only need to get you to retirement – but through it as well. And times like these can also become an opportunity for making such moves as tax-loss harvesting and dollar-cost averaging.
Here's the Simply Money Point: Simply put, things might get worse before they get better. But we’ve been here before. If it helps, think of the long-term movement of the stock market like a person walking up a staircase playing with a yo-yo; you’ll see regular ups and downs, but overall, the trajectory is upwards.