What do Stock Market Declines mean if you're 30-50 years old?
WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
Think back to the last “down” year in the stock market when you personally had money at stake....it was probably back in 2022 when the S and P 500 was down over 19% for the year.
How did you feel as it was happening? What was going through your mind as the market went down, seemingly without rhyme or reason.
It’s demoralizing. Having to look at your statements when it seems like all the money that you’ve been saving for years hasn’t made a dent?
Brutal.
And yet, to all that, I ask, in earnestness: “What did it mean for you? What did those lower stock prices and retirement account balances mean for you as you look back? What did these losses, which existed only on a piece of paper, mean for your day-to-day cash flow or the trajectory of your financial roadmap?
I’m not trying to minimize the frustration we all feel each time this happens (approximately once every 5-6 years historically) but I'm trying to get us all to think about the broader picture. If we've done the proper planning, we have our emergency reserves & short term reserves properly funded, while placing our long term money into our "Later" and "Last" buckets to maximize growth....well, then, we won't need to pull money out to live on.
And so, the only reason that these declining stock prices should cause us to worry or change our approach would be if we thought this market decline was the start of a permanent decline & that the markets would never again reach new heights. Right?
After all, we don’t freak out every winter and take the cold weather as a sign that we’ll never see the summer sun again.
Look here:
EVERY single market decline of 25% or greater (like we’re experiencing now) resulted in positive returns a mere 3 years later, (all but one a mere one year later!), and the returns 5+ years out were exceptional.... consistently. This should remind us of what we already know: stock market declines are temporary and their inevitable advances have, thus far, been permanent. (Using the S and P 500 as representative of the stock market as a whole.)
More to the point, there has not been a single market correction in history from which you would have benefited from selling out a balanced & diversified equity portfolio.
In fact, selling is literally the only way that you can turn a temporary decline into a permanent loss…which means that the stock market itself has actually never lost money, only human behavior is capable of pushing that particular lever.
I’ll take it one step further: it’s a normal feeling to think that as the decline gets worse and we move from being 20% down to 25% down etc. that your risk is rising right? But, it’s actually the opposite: You’re now that much closer to the market bottom and, as logic dictates, that much closer to the inevitable market rebound. Starting to panic now would be like running 24 miles of a marathon and then worrying that you might not finish…. You’ve already put in the work & endured the pain…with each step forward, you are closer to the end!!
This is not to say that the stock market can’t go down further…that we won’t see 30% or even 40% losses the next time that we experience a 25% decline…. it’s possible. But the next time we find ourselves on the brink (and we will) remember that with each passing day, we are getting closer to the stock market rebounding and to us being rewarded for our patience, discipline and steadfastness (after all, market volatility simply transfers risk from those that can’t handle it to those that can.)
We don’t know when this will happen but we do know that the only true long term investment risk you face is not being invested when it does…I'm never worried about experiencing the next 20% decline but rather about missing out on the next 100% advance.
And with that, I’m going to take a second & make a confession. Every time I write the words “the stock market” or “the market” or “stock prices” in one of these pieces, I feel a bit guilty that I am adding to un unfortunately ubiquitous misconception.
Because these words blind us from what we are really doing.
We are not buying stocks. We are investing in companies.
We do not simply own “stocks” whose prices are temporarily lower. We are stakeholders in a collection of the world’s most successful businesses.
When prices are down the greatest companies of America and the world are being offered to us all at an incredible discount. And the more these prices go down, the more attractive the long-term ownership of these companies become from a buying (& holding) standpoint. It's only logical.
And this gets to the heart of the matter.
I’ll let Warren Buffet, in his 1997 Berkshire Hathaway newsletter, drive this point home:
“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock price during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equity in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
So smile when you read a headline that says “investors lose as markets fail.” Edit it in your mind to “dis-investors lose as market falls- but investors gain.”
Again, I’ll remind you that Warren Buffet wrote this during a 1997 market decline.
The “market” is up over 250%+ from the year of that letter.
In short, assuming that we’ve already built your Financial Life Plan® and you have a purpose-driven Bucketed Investment Plan, your money is specifically positioned to achieve your long-term financial goals…. short term price fluctuations becoming nothing but a speed bump!
Schedule your 15 minute "Right Fit" call here.
