Is the stock market crashing?! If so, what do we do? Should we wait to invest? In this post, Clo Bare Money Coach breaks it down for us so you can decide for yourself.
The stock market is crashing! The stock market is crashing! What do we do?!??!?!?
Don’t worry, fam, everything is going to be alright. Take a deep breath and close out of your brokerage apps. This is part of the process.
In the last few months, you may have been checking the stock market and thinking, “Holy crap. This is a crash. I should pull out all of my investments!”
In this blog post, I’m going to explain what the current environment means and how this may inform your investing decisions moving forward.
Disclaimer: I am not a financial advisor or CFP.
But before I do that, keep in mind that this is for educational purposes only. I am not a financial advisor or a CFP, so at the end of the day, I can only give you my opinion and some education so that you can do your own research and make informed decisions.
The Stock Market is Crashing?! Watch this Post on Youtube
The 2022 Stock Market... Crash?
If you’ve been paying attention to the stock market at all, you will have seen that year-to-date (as of May 2nd, 2022) the S&P 500 is down ~13.37%. And if you’re looking at the stocks inside of the S&P 500, you’ll notice some of the stocks are down 50% or more (looking at you Netflix).
Now, what does this mean?
What we’re experiencing now is called a correction and we may be entering into a bear market.
A correction is when the stock market falls in value by at least 10%, but less than 20% from recent market highs. It’s not the same thing as a crash, as we often confuse the two. A crash is when SUDDENLY there’s a very sharp decline in stock prices, often in a day or a week.
Now, there is speculation that we may be entering into a bear market in coming months.
What is a bear market?
Bear markets describe when stocks fall 20% or more from recent highs, for a sustained period of time. The easiest way to remember a bear market versus a bull market is to think of the way that these animals attack their prey.
When a bear attacks, it swipes down.
When a bull attacks? It swipes up.
The S&P 500 Correction of 2022
The S&P 500 specifically had some of its all-time highs in 2021, so it’s pretty normal for us to see a correction. The S&P 500, which contains a lot of tech stocks (28.02%), was considered, by several financial experts, over valued last year.
Lots and lots of folks threw money at the S&P 500 last year, and because of that– the S&P 500 could’ve been bought and sold at prices that were actually higher than its intrinsic value.
Meaning we THINK they’re worth more than what they are, so we throw more money at them… further increasing the value of the stock, while the underlying assets may or may not be actually increasing in value.
Weird, I know. Let’s break it down.
Overvalued? WHAT DOES IT MEAN.
Think about it this way.
When you go to a blind auction, you write down on a piece of paper how much you’re willing to pay for the item– let’s say season tickets to the Blackhawks.
Since you can’t see what other folks are offering in the blind auction, you have to best guess what YOU think the value is, and offer it up.
Now, you MAY get the season tickets for a GREAT price (WOO!), but maybe you actually overvalued how much you think those tickets were worth, and ended up with the highest bid– BY FAR.
Did the actual value of those Blackhawk tickets increase just because you paid more for them?
You just paid more for the tickets than what they were worth… cause, well. You got a little emotional, didn’t ya? Ya THOUGHT they were worth that much, but truly you only believed they were worth that much.
It’s KIND of similar to overvaluing and undervaluing a stock or other security. Make sense?
Back to Corrections
With the supposed overvaluation of tech stocks over the last several years, it’s really no surprise that we’re experiencing what’s known as a stock market correction.
Think about it this way. We were too high before, so we’ve got to correct and find a good balance again.
Now– the number one thing I want you to take away from this is the following:
THIS IS NORMAL.
Bear markets and bull markets are both normal parts of the stock market cycle.
I’m going to say it again.
THIS IS NORMAL.
What lots and lots of investors do at times like this, both experienced and new investors alike, is they panic, and they sell their investments at the worst possible time.
That’s probably the opposite of what you want to do.
Instead of doing that, let’s take a moment to educate yourself on how the stock market works..
And if you STILL want to panic sell?
By all means. It’s your life and your retirement. I can’t tell you what to do. All I can do is educate you so you can further research and eventually make your own decisions.
So let’s talk about it.
The Dow Jones Industrial Average (DIJA) is an index that tracks 30 large, publicly-owned blue-chip companies that trade on the New York Stock Exchange and the Nasdaq. It was created in 1896, and was really meant to serve as a representative sampling of the entire US stock market.
AKA– this index is supposed to show us how the whole US stock market is doing, even with just 30 stocks.
If you look at this chart of the performance of the Dow Jones over the last 100 years, what you’ll notice is there are a lot of ups and downs, but generally we’re on an upward trend – especially in the last 40 years.
What does this mean to you?
The ups and downs are really, really… I mean REALLY difficult to time. Timing the stock market is an incredibly difficult thing to do because lots of different things impact what the stock market is doing on any given day.
Things like war, pandemics, investor emotions, economic changes, and business decisions all influence the stock market’s performance. Even the best minds in the finance industry try to predict what’s going to happen in the stock market and they fail, time and time again.
But wait… what is timing the market?
Trying to time the market is what you think of when you think of folks trading stocks. You try to buy low and sell high. That sounds like something we should all try to do, right?
The reason that this is not the most effective approach is because– again– trying to time the market is incredibly difficult.
Studies: Why Timing the Market is… HARD AF
Let’s go over some of the studies that have shown just how difficult it is to time the market, shall we?
According to the US Securities and Exchange Commission, 70% of active forex traders lose money. Active traders are the folks who are trying to time the market by actively buying and selling on a daily basis. This study also shows that traders typically lose 100% of their money within 12 months.
According to the Motley Fool, a stock market correction happens about once every 2 years. A bear market, which is when stock prices are going down for a significant period of time, usually happens once every 5 years on average and lasts anywhere from a few weeks to a year. Bull markets are when stock prices are going up and they usually last for years. According to Forbes, these tend to be longer and more frequent than bear markets. Bull markets have occurred for 78% of the past 91 years.
Again… totally normal.
Another Reason to NOT Attempt to Time The Market: Diminished Returns
Another reason why it’s not a good idea to wait to time the market is because that’s more time that you are spending not invested in the stock market. And honestly, in my opinion, not being invested in the stock market is one of the riskiest things you can do.
J.P. Morgan conducted a study from 1999 to 2018 and they found that even if you missed the 10 best days in the stock market, your overall returns were cut in half.
You only had to miss 10 days over the course of 20 years to see significantly fewer returns from your investments. It’s so hard to predict when stock markets will reach their highest points, and if you’re missing out on the highest points of that timeframe, you are going to see significantly fewer returns on your investments.
Another study by Putnam Investments showed that if you were fully invested in the S&P 500 from 2003 to 2018, and you missed out on the 10 best days in the market over that 15 year period, your returns were cut down to 2.65%.
I love this type of data when it comes to learning about the stock market. Why? Cause education and informed decisions is the cure to anxiety around investing.
So let’s share a couple more.
A study was done by Dalbar Firm to show what an active trader’s average performance was versus the S&P 500 during the same time frame. What they found during the 20 year time frame of the study was that the average investor’s (i.e. someone who is actively trading) returns were 5.29%.
The S&P 500? 7.2%.
Do you see where I’m going with this?
There was another infamous study done by Warren Buffet where he bet a hedge fund company that they could not beat the S&P 500. He gave them a 10-year time frame and basically said that if they’re able to beat the returns of the S&P 500, he’d give them a million dollars. If they weren’t able to accomplish that, then they had to give him a million dollars. Obviously.
What happened after those 10 years of investing?
The hedge fund manager’s average annual return was 2.2%.
And you guessed it, the average annual return of the S&P 500 was 7.1%.
But wait… there’s more.
How to Not Lose Money in the Stock Market: Stay Invested in the Stock Market.
Another key component of being a successful, lazy investor is making sure that you have a long term time horizon. The longer you hold your investments, the more the risk of losing money decreases.
But first… What is long-term investing?
Long-term investing is when you plan to buy and hold an investment for the long-term. Long term can be defined as 10+ years.
On to the studies.
BlackRock Investment Firm did some studies to find out how often investors are losing money when they’re invested for only 1 year, 2 years, 3 years, etc., all the way up to 15 years. With nearly 100 years of data, they found that if you were only invested in the stock market for about a month, you had a 62% chance of making money and a 38% chance of losing money.
In 5 years? Your chance of making money is 89% and losing money is 11%
In 15 years? You have a 99.8% chance of making money. I don’t know about you guys, but I will take those odds any day.
Now, all of this only applies if you are diversified. If you are solely investing in one stock, like Apple or AMC, that’s a lot riskier.
When we’re talking about long-term, successful investing, we’re talking about diversified investments like total stock market index funds and S&P 500 index funds. Those have hundreds, if not thousands, of diversified stocks inside of them.
So, what does all of this mean?
Personally, I take all this data as confirmation that trying to time the market is incredibly difficult to do, and if the best minds in finance can’t do it, then the average Joe’s chances of doing it are pretty slim.
I would rather be investing in the whole stock market. When we’re investing in broad-based index funds, time and time again, they are going to outperform most active traders as well as most actively managed mutual funds.
Instead of trying to time the market, what we should be doing is buying very diversified investments, holding for the long term, and sticking to the plan despite whatever may be happening in the market and in the world.
My hope for you?
I hope all of this data gives you a different perspective of what it means to be a long-term, diversified investor and the importance of crafting a portfolio that meets your personal risk preference.
If you’re someone who is interested in lazy investing and wants to not worry about how your investments are doing day-to-day, then make sure you’ve grabbed my free money guide and keep checking in with me here.
Let’s get lazy, y’all.