Calling all smart, long-term investors: It’s time for a refresher course in stock market history.
Stocks go up. Stocks go down. But over time, stocks go up a lot more than they go down.
Sound too simple? Well, yes, that is the simplified version. But it’s accurate. That’s how it’s been for decades, and that’s how financial advisers expect the market to work for decades more to come.
“I advise my clients that these declines are expected and will happen many times again if they live a long life,” says Jack Oujo, a certified financial planner and certified public accountant based in Wall.
Yesterday was another example of this year’s craziness on Wall Street. The Dow Jones industrial average fell as much as 323 points during the day before rallying late to finish nearly 300 points higher, at 12,270.17.
Broader stock indicators also surged. The Standard & Poor’s 500 index rose 28.10, or 2.14 percent, to 1,338.60, while the Nasdaq composite index rose 24.14, or 1.05 percent, to 2,316.41.
Oujo recommends investors look to history to see if buying during past declines has been a good move for long-term investors.
Overall, it has.
Jim Marchesi, a CFP with Summit Asset Management in Florham Park, says there have been approximately 30 bear markets over the last 100-plus years.
“This market, if it hits bear status, won’t be the last. The bottom line is that time heals all entry points in quality investments,” Marchesi says.
That said, here are five things you can do to make sure you and your portfolio stay smart.
1. DON’T BE RASH
The market is tanking and you’re breaking out in hives?
Hide your account statements and temporarily lose your broker’s phone number. If you’re a long-term investor with a diversified portfolio, this big bump in the road is just that — another bump.
“Most of the time, stocks recover from a bear market in less than 18 months,” Oujo says. “I expect this to be no different, assuming that are no `non-economic’ events such a terrorism.”
If you invested for the short-term, meaning you were planning to use the money in the next two years, those funds never should have been in potentially volatile stocks. If you’re tempted to cut your losses, wait. Take a deep breath. Don’t bail whole hog on your investments. The losses are only on paper until you actually sell.
Buy some skin cream instead.
2. SHUT OFF THE TV
Financial media outlets such as CNBC can offer an exciting horse race of market moves. But if you’re tied to your TV, especially during a selloff, your nerves will be jumping as if you’ve been downing double-shot espressos all day.
For your own sanity — and your financial health — cut it out.
“People should not watch CNBC during regular business hours, since that programming is geared toward traders and not long-term investors, in my opinion,” Oujo says. “It is financial pornography.”
This falls in line with the conventional wisdom — and smart advice — that you shouldn’t look at the growth or losses of your investments every day.
“It’s going to give you a heart attack,” says Bernie Kiely, a CFP and CPA with Kiely Capital Management in Morristown.
3. DON’T SELL
After several years of solid gains in your portfolio, your gut may be telling you it’s time to sell before your winning investments become losers. Advisers agree now is not the time.
Selling during a decline is rarely a good move, Oujo says.
“You have to make two calls and get both of them right,” he says. “Call No. 1 is that the market continues to decline. Call No. 2 is that you buy back at a lower price. If you do not get both calls right, you lose.”
When you created your portfolio, you probably had good reasons for buying the investments you still hold. Maybe it’s a mutual fund that consistently outperforms its peers over the long term. Maybe it’s a stock that has positive long-term prospects, such as new products soon coming to market. Maybe it’s an investment that fit well into your overall asset allocation plan.
“If your investments were made for sound reasons, then don’t get out of the market,” Kiely says. “If you get out, when are you getting back in?”
4. GET READY TO BUY
You may need to comparison shop, but when stocks drop, investors can generally find some fantastic buying opportunities.
Whether this is a correction or the start of a bear market, the chance to buy solid companies at a cheap price doesn’t come along very often.
“When they do lumber along, use it as an opportunity to upgrade your portfolio,” Marchesi says. “Buy the great companies that rarely give investors the opportunity to get into them at attractive long-term entry points.”
The downturn is something Kiely and Oujo are both taking advantage of. They say they’re planning to fully fund their retirement plans for the year this week, so they can buy low.
You can do the same with your Individual Retirement Account. If you usually wait until April 15 to fund your IRA, or if you dollar-cost average through the year, do it today instead and take advantage of buying low.
Every family should have “pots” of money. The short-term pot is for expenses you’ll incur soon, like that new car you were planning to buy this summer. The medium-term pot covers costs you’ll face a few years down the road, such as your 12-year-old child’s college tuition. Then there’s the long-term pot, such as for retirement.
A market downturn is a good time to revisit how you’ve allocated your savings and buff off any scratches or bang out any dents you find.
Kiely, gives this example: Say the stock market experiences a five-year bull run, consistently posting outstanding gains, but the bond market remains flat. Although you may have initially allocated a 50-50 split between the two asset classes, you may find that, due to its superior performance, stocks now represent 75 percent of your overall portfolio.
That means it’s time to rebalance.