What's your timeframe?
Lately, there is a lot of talk about the market. How does it affect our retirement portfolio? What about the economy? Will people go back to work?
Many of the questions are hard to answer. However, there is one that I believe should be addressed today. That is the question regarding our investments.
You likely utilize a 401k or IRA for tax-advantaged savings. You've built this over a very long time. Perhaps you're asking, "What should I do?". Why should you do anything? Let's put this into perspective.
Every day I see news telling me the market is moving one way or the other. Every week I receive emails about inflation, politics, or business that will affect our investments. This is all noise and pushes us to ACT NOW.
Remember, we make decisions for the long term. We plan ahead in anticipation of these things. So why would we act without thinking? We are looking forward to three, five, or ten years from now. So let's think about this from a long-term perspective and push those daily and weekly updates aside.
Opportunity
Unless you are very close to retirement (1-3 years), you should see this as a great opportunity. The companies that make up the equity market are priced at a fraction of where they were just months ago.
Most people use the S&P 500 or another index as a major part of their investments. Many are looking to SELL at these reduced prices (out of fear). Why would you sell at today's reduced prices if you don't need the cash? The best investments in history have been made after a major market crash. Why not be a part of the "smart money" that takes advantage of these reduced prices?
A common quote from Warren Buffet is "Be fearful when others are greedy, and greedy when others are fearful." A quote from the investment industry: "buy low and sell high". I'd argue that today prices are low, and many are fearful.
This leads to another consideration. Can things get worse, and by extension, can fear grow to heightened levels?
Yes, prices may continue to drop. In fact, we may see levels of fear in the markets that match those of the 1930s or the more recent events of 2001 or 2008. For those close to retirement this can get quite complicated and likely requires a more defined plan from an investment professional. For those with longer horizons, this poses an incredible opportunity.
Let's assume that today's equity market overall may return 6-8% per year (on average) for the next 10 years. If you purchased today that seems to be a great return.
Remember, if the prices continue to go down, the underlying future profits from the companies do not change. (They will perform the same business whether their stock price is up or down.)
As prices drop, your return on investment goes up. Let me explain. Today I'm buying at a possible 6-8% return. If the prices drop, I can buy more at a lower price.
Example
6 months ago I bought company XYZ for $100 per share. They were very profitable and made $15 per share of earnings last year. That would be a 15% return each year. (What a great investment!) However, they just lost 40% of their market value and now are on the market for $60 per share. I have the option to sell my shares for a huge loss $40/share. Alternatively, if there are no changes to the company's underlying business I may want to buy more. The shares are $60 with underlying earnings of $15. That's a 25% return, far better than the 15% return I originally purchased the shares for!
There is a term for this called "Dollar-cost averaging". Buying into the market, whether it's up or down, at regular intervals over a long period of time. That's how we take advantage of low prices and avoid selling when prices are low and we are fearful.
It's impossible for me to know if prices will go up or down. What I do know is that historically there is a recovery after every market correction. Our economy will continue to grow, companies will continue to make profits, and the shareholders (you) will earn returns for owning those companies.
