A 2nd chance at stocks
The stock market has retraced practically all of its losses. If you gritted your teeth and rode it out, you have a right to feel smug — or at least relieved. If you panicked and sold near the bottom, you’re likely kicking yourself with remorse.
But now you get a second chance to revisit your investment choices — something that rarely happens in the stock market.
Let’s start with one basic fact. No one knows if the market will retrace its decline, or move on to new highs. No one can be sure. The very public examples of well-known market analysts, hedge fund managers and TV commentators make it clear that no one has the magic answers all the time.
But a lot of the “smart money” is reeling in this rapid market rebound. Surely, some were buying at or near the bottom. Remember that every transaction requires a buyer and a seller to set a price and agree to trade. So for every share purchased when the Dow was at its 18,213 bottom, someone sold — and regrets it now.
The real winners have been the longterm investors who had the discipline to ride out this roller-coaster. It wasn’t easy, but it was the best plan in hindsight. And if you look at long-term stock market history, riding it out has always been the best plan.
When the Dow crashed in 1929, it did so from a peak of 381.17 — ultimately losing more than 50% of its value.
That swoon was followed by a 52% bounce off the lows. But as the economy subsequently collapsed, the Dow fell 89% from its September 1929 highs before reaching a final bottom. Yet here we are today, 90 years later, with the Dow at 27,000.
And while you may not have a 90-year time horizon, history shows there has never been a 20-year period since 1929 where you would have lost money in a diversified portfolio of large-company stocks, with dividends reinvested — even adjusted for inflation.
Investors always face the same challenges: buy more, sell or hold on.
If you’re under 50, the advice is always the same: Keep adding to your 401(k) or IRA on schedule. Over the long run, at least 20 years, history says you’ll come out ahead.
If you’re a stock trader, you certainly don’t need my advice. Many of you have picked stocks that have doubled since the bottom, in the excitement over revenues from staying home (think Zoom and Amazon) or in the reopening (think airlines and energy stocks).
If you’re close to or in retirement, the task is more challenging. You need growth over the longer run, and stocks provide that. But you need to balance the risk in stocks with enough safe money on the sidelines so you don’t panic if there’s another market decline.
Now is your chance to review your situation, while remembering the shock of the past few months. Yes, it could happen again. Why would the market go down again? Perhaps another round of COVID-19, though we pray that won’t happen. Or perhaps the economic rebound has been overstated, jobs might not come back and consumers might not feel confident enough to spend again.
Why would the market go even higher? The Fed has promised enough money to fix anything it can. And the Fed has unlimited money creation powers. Money moves markets. And Congress seems intent on passing some kind of additional stimulus package. Both parties will come to agreement since, after all, this is an election year.
But here we are now, almost “even.” And now you get a second chance to assess your stock market exposure. Remember those sleepless nights when the market was crashing? This is the time to reconsider your allocation to stocks. And then live with it. That’s the Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.