Home Business Stock market: 5 ways to keep Dow losses from scaring you and messing up your financial plan

Stock market: 5 ways to keep Dow losses from scaring you and messing up your financial plan

11 min read

Plunging stock prices can even rattle the nerves of a veteran markets reporter who’s been covering Wall Street’s ups and downs for two decades.

But through the years — after watching many nail-biting down days for the Dow and listening to pundits regularly warn of a bear market or big crash — I’ve come up with ways to fend off the panic of rising paper losses in my 401(k) and taxable fund accounts.  

Given the recent wild ride that temporarily knocked the broad stock market down 10 percent from its high last week and again Monday, and the accompanying spike in fear, I figured now was a good time to share my personal survival guide. 

I got my first taste of market mayhem 10 days after joining USA TODAY in March 2000, when the dot-com stock bubble burst. My first 30 months on the job were spent covering a bear market, which erased nearly half of the market value of the Standard & Poor’s 500 stock index. Next up was the harrowing financial crisis in 2008, an event that kept me up at night wondering if I’d be able to get money out of the bank in the morning, and which wiped out 57 percent of the market’s value.

More Money: Dow, hit by October blues, posts loss after Caterpillar, 3M offer worrisome forecasts

More Money: Stock market: Should investors fear a correction, or 10 percent drop?

More Money: Stock market: How to avoid investment mistakes when Dow swings up and down

But there are ways to survive the gloomy, anxiety-ridden thinking that is set in motion by a stock-market retreat, and to keep from giving in to irrational behavior. That doesn’t mean the market doesn’t face challenges, such as rising interest rates, fallout from trade disputes and signs that global growth is slowing.

Just remember that the market, no matter how hard or how far it falls, always rebounds.

Here are five tips to keep your perspective from a survivor of two of the biggest market downdrafts since the Great Depression.

Focus on year-to-date losses

No doubt, headlines blaring the stock market is down 10 percent from a high can spook investors. To avoid getting too alarmed, however, a better way to measure your paper loss is by looking at how much you’re portfolio balance has dipped since the start of the year. 

Let’s say you started 2018 with $100,000 invested in the S&P 500 stock index. When the large-company stock gauge reached a closing high for the year of 2930.75 on September 20, its gain of 9.6 percent would have increased your account balance to $109,618. Even after the market’s 9.9 percent dive to 2641.25 at the recent pullback low after Monday’s wild ride — which sliced $10,852 off the value of your investment — your account balance would have declined to just $98,765  for the year.

So even though the market gauge gave up a nearly 10 percent gain for 2018, it is down a little more than 1 percent on the year, with a paper loss through Monday’s close of roughly $1,200. That size loss is not a reason to panic.

Tally losses from your ‘total’ portfolio

Sure, a dive in the stock market sounds bad. But most people don’t have every cent of their money invested in equities. Let’s say you began the year with 60 percent of your money invested in the S&P 500 and 40 percent in bonds and cash. Assuming a portfolio totaling $100,000 at the start of the year, having just 60 percent riding on stocks means your dollar loss, measured by the S&P 500’s 9.9 percent pullback loss, was only $5,940 at the low of this turbulent period. While losing nearly six grand isn’t fun, it’s a far cry from being wiped out. Gains from cash and bonds, albeit likely small ones, also help to offset your stock losses. 

Put market’s current level in perspective

At Monday’s market closing low, the S&P 500 hit its lowest level since early May. At that time the market was down 1.6 percent on the year. Were you as spooked back then as you are now? The market is now 1.2 percent below its 2017 close. Nearly 10 years into a bull market that was up 333 percent at its peak in late September, seeing an investment return to a level it was at just five months ago is far less frightening than stocks hitting, say, a fresh, five-year low.

Remember stocks you’re buying are cheaper

Those regular 401(k) investments that come out of your paycheck occur no matter if the market is rising or falling. While it may feel better when stocks are going up, it means you are accumulating shares at higher prices. When times get rocky, it’s a good idea to remember that when stocks are down sharply, you’re buying them on sale. Buying with the S&P 500 10 percent lower than where it was at the end of September actually means you’re getting a better deal, as you are purchasing more shares of the index.

View losses by time frame

When figuring in your head how much money you’re down from the highs, it’s a good idea to think about your investments in two baskets: What you might need now, versus what you need in the long-term, like for retirement.

If you have plenty of cash sitting in a money market account or in lower volatility bonds that you can tap for short-term needs, there’s no reason to worry about money riding on stocks in taxable accounts, or sitting in a 401(k) that is earmarked 10 or 30 years down the road.

Viewing losses through this different lens is a way to keep your fear levels in check and your long-term investment plan on track.

Let’s block ads! (Why?)

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

Check Also

iPhone 11 vs iPhone 11 Pro comparison: Which should you buy? – 9to5Mac

Last week, we broke down all of the differences between the iPhone XR and iPhone 11 – …