Sticking It Out with Stocks: A Reality Check

Throughout the past several weeks, the stock market has felt like an absolute roller coaster. Some people are screaming sell. Others are screaming buy. And many, many people who are invested in stocks or mutual funds without really knowing what to do are jumping when these people scream.

But in the end, I think that those who are cool, calm, and collected will prevail. The reason that these people are really calm is not what you might think. Many many people say that they can be nice and calm in the face of these dramatic swings in the market. They say this because they know that they are in the stock market for the long term: 10, 20, or maybe even 30 years.

Time horizon is not a reason to be calm in a down swing, however. If you think you are losing money, then I don’t really think it makes much sense to just blithely ride it out. Sometimes, you are losing money. This is when you are seeing the actual value of something become worth less. Money falls out of your wallet and you lose it. This is lost money. Or, you have a car that is worth 10K and you are in an accident without insurance. Now your car is wrecked and is likely worth 1k or less. That is lost money. A dip in the stock market is usually not lost money.

Real value is what determines whether or not you lost money. Personally, I look at stock market investing in this manner. The stock is worth whatever someone is willing to buy it for. Then factor the value of the company represented by the stock. It sounds silly and crude. That’s because it is. I put it this simply to make a point: a 2% drop in the stock market isn’t lost money.

Lost money is money that you lost; its gone already. But to say that you’ve lost money in a stock investment, you must sell the stock. That is losing money. But in the case of a normal investment for retirement, you know that you will be investing for 10, 20, 30 years, so you think there’s no need to worry because the stock will come back up. However, the reality is that not all stocks come back. Many times, stocks go down and stay down.

Understanding the market and watching your investments is critical to successful investing for retirement. It might seem obvious, but the fact is that retirement investing requires patience and watchfulness and cannot be a simple dollar cost average and “forget it” for 30 years.

I don’t advocate active trading for retirement unless you are an experienced, proven investor. I also like index funds, but even with these you must be careful. A basic index fund bought using dollar cost averaging is a great start, but there might also be other ETFs, investment vehicles, risk tolerance, and allocation issues to consider. Depending on your plan, you may not need to watch everything like a hawk, but not paying any attention for years on end seems to be courting disaster. Similarly, putting all of your investments into a single index fund seems risky to me since the custodian of the funds could run into problems.

In the end, it is important to educate yourself, make a sound plan that you stick to, and then remain calm throughout the ups and downs. This attitude comes not just from your time horizon, but also from the security that comes from reviewing your investments and making slight modifications based on life plans, available investments, risk tolerance, and asset allocation. I’m convinced at this point that the people who are going to really lose money during the turmoil of the market are people who either panic because they are afraid or panic because they didn’t educate themselves or make a good plan beforehand.

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As always, I am not a financial adviser and have no formal training in this field. Rather, this article is simply an average investor writing an opinion. Before making any decisions, you should educate yourself and consult a professional.