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Although individual situations may vary, the average retirement saver should probably stay the course, experts say but there are safer investments available if you can’t risk riding the ups and downs of the stock market.
Key Takeaways
While it’s tempting to dump stocks when the market is down, experts say that’s usually a bad move for a typical retirement saver. Stocks usually deliver better returns over long timespans than other types of assets, despite being vulnerable to downturns like the current one.
If you sell when stocks are down, you’ll miss out on the gains you’d get if and when the market recovers. For more conservative investors, CDs, treasuries, and money market accounts are less risky places to park your money.
There’s no doubt the stock market has taken a beating this year. As of October 3, the S&P 500 stock index was down 23% since the beginning of the year, which hits individual investors hard. If you’re saving for retirement, your account probably has been hammered, especially if you’ve still got decades until you retire. (Retirement investors tend to concentrate less on stocks as they get nearer to retirement, while those further away may have accounts that are heavily weighted toward stocks.)
By the end of the second quarter of 2022, the average value of a Fidelity was down 20% over the previous 12 months, the company said in a report in August.1
Stocks have generally fallen due to the Federal Reserve’s string of interest rate hikes, which are intended to slow down the economy and cool inflation by making money harder to borrow. That means consumers aren’t able to borrow for big ticket purchases and companies aren’t able to borrow to invest in their businesses, which in turn impacts the profitability of companies all of which tends to drag down
If you’ve taken such a hit to your portfolio, it may be tempting to cut your losses and get out of the stock market completely. But retirement experts say that might be a mistake.
Many families have been visiting Fidelity investor centers nervous about the recent stock market volatility, said Jennifer Sirois, vice president and branch leader for the Fidelity Investments in Nashua, New Hampshire.
“We generally don’t recommend investors pull their money out of the stock market as a knee-jerk reaction,” Sirois said in an email. “Markets ebb and flow, so staying the course with investments is typically the best suggestion.”
Why Shouldn’t I Panic?
Investing helps you safeguard your retirement, put your savings to their most efficient use, and grow your wealth through the magic of compounding. Why, then, do 44% of Americans not invest in the stock market, according to a July 2021 Gallup survey?1 Gallup posits that the reason is a lack of confidence in the market due to the 2008 financial crisis and the considerable market volatility of the past year. Additionally, those without sufficient savings to get by month-to-month generally don’t have money to invest in the market either.
From 2001 to 2008, an average 62% of U.S. adults said they owned stock a level never reached since, according to Gallup. A stock market decline, due to a recession or an exogenous event like the COVID-19 pandemic, can put core investing tenets, such as risk tolerance and diversification, to the test. It’s important to remember that the market is cyclical and stocks going down are inevitable. But a downturn is temporary. It’s wiser to think long-term instead of panic selling when stock prices are at their lows.
Long-term investors know that the market and economy will recover eventually, and investors should be positioned for such a rebound. During the 2008 financial crisis, the market plummeted, and many investors sold off their holdings. However, the market bottomed in March 2009 and eventually rose to its former levels and well beyond. Panic sellers may have missed out on the market rise, while long-term investors who remained in the market eventually recovered and fared better over the years.
Why It Pays To Be Patient
There’s a big downside to getting out of stocks: You could miss out on the gains and compound earnings that you’ll get if and when the market goes back up again, experts say. For example, suppose you bought a stock for $50, and in the current market its price is down over 20% at $40. If you sell now, you would lose $10. However, if you wait and the stock price rises to $65, you would make a 30% gain on your initial investment.
The important thing to understand is that most people cannot successfully time the markets—not even experienced traders. Your best bet is usually to let your investments weather large swings over a long-term investment horizon.
“Vanguard believes that staying the course and maintaining a low-cost, diversified portfolio, built to withstand market fluctuations, is the best approach during market downturns,” said Lauren Wybar, senior financial advisor at Vanguard Personal Advisor Services. “When investors abandon stocks, they may miss out on typical market recoveries that follow and the power of compounding ahead.”
Indeed, most retirement savers are in it for the long-haul—that is, more than 10 years—and the conventional wisdom is to ignore the up-and-down blips, because stocks tend to recover and produce stronger returns than many other assets over time. According a historical analysis of the S&P 500 by the Schwab Center for Financial Research, the average bull market over the past 50 years or so ran for about six years, averaging a cumulative return of over 200%. Meanwhile, the average bear market lasted only 15 months, delivering an average cumulative loss of 38.4%.2
But for risk-averse investors, there are approaches that can limit the downside of stock market crashes. Sirois said increasing the proportion of bonds in an investment portfolio is one option, since those tend to go down less than stocks when the market slumps, or targeting stocks that have historically had less volatility. Stocks that tend to exhibit more resilience compared to the broader markets are often called defensive stocks and can be found in sectors such as consumer staples, utilities, or healthcare.3
Source : https://www.thebalancemoney.com/the-market-is-down-should-i-sell-all-my-stocks-6746645