This is an interesting time in history for everyone. We have just been through a year of crisis like most of us have never seen. Not only has the crisis affected your life this last year but it has affected your investments as well.
Most of the crisis was reflected in stock market movements. The stock market is a leading economic indicator, meaning that the stock market itself predicts what is going to happen to the economy in the future. So, if investors see trouble ahead they sell stocks and if they see good economic times ahead they will buy stocks. The lead time may be days, weeks, months or years but the consensus of investors feelings about the future drive the overall market.
In the past, bad news for the economy has been devastating to the stock market. The most recent crisis began in February 2020 and is still with us. From the middle of February 2020 to the third week in March the stock market dropped around 35% in that short period of time because the economy shut down. The Dow Jones Industrial Average dropped over 2000 points on two different days and almost 3000 points in one day on March 16th for a total of about 10,000 points in 23 days. Many investors sold some or all of their stocks whether they were individual stocks, mutual funds or ETF’s. It was undeniably a scary uncertain time and the stock market does not like uncertainty.
This last year was a lesson in stock market dynamics. But this scenario has played out many times over the years. You would think people would learn from the past, but they don’t. Instead of looking at these events as opportunities they panic. Many investors get through it by burying their heads in the sand. They don’t open their investment statements or just don’t look at their accounts online. Other investors, overwhelmed by the news and the fact that they could “lose more money” sell all their stocks.
Events like this are a boon to sales people that sell everything from annuities and insurance products to gold and other so called “safe” investments. They say why would you ever invest in the stock market and lose money. Well, you only “lose money” if you make a huge mistake and sell during an event like this. If you know and expect that every so often this kind of event happens, you won’t lose money in the long term. Those safe investments generally have very high fees and the return is nowhere near what the stock market does over time. The salespeople cash in on these events, at the expense of the individual investor. They use fear to sell their products and it works.
On March 23rd 2020 the Vanguard S&P 500 Index fund ETF hit $192 a share down from $310, that is a 38% loss. Bad, yes but since then that fund is up from $192 to $383. So, all of the people that sold the stock market, what do they do now? They buy stocks of course, or go buy gold or an annuity. The lesson is that if you can’t keep your finger off of the sell button in a crisis that you know is coming someday, don’t invest in stocks.
An easy way to think about this is to designate a portion of your savings to growth, the stock market. Put the rest in more stable low return investments. Let that portion invested in stocks grow and leave it alone, knowing it will fluctuate and sometimes have big losses. Then, think about huge losses in the stock market as an opportunity not a disaster. The stock market is up almost 100% since March 23rd 2020. Sounds like that was an opportunity to me, not a disaster.