The stock market has been as volatile as a napless 2-year-old, and all of us want to know when this little monster will calm down — then, once our investments stop the up-and-mostly-down, we will sleep better too.
Here’s the only true answer: Nobody knows when it will be over. But market history is reassuring. So far, big drops have always been temporary. But “temporary” depends on how you define it. The briefest bear market was the most recent: In 2020, the market was in a bear market — defined as down at least 20% from a previous high — for just 33 days. It took five months to break even. And because of recency bias, that’s what most of us are thinking is reasonable.
Add that to the fact that, save for that brief bear market and quick recovery, markets had been in a record 11-year bull market. Just like we hope when we invest.
Sadly, the stock market is now behaving, well, like markets typically do. When things are calm, we think they always will be. Last year, the S&P gained 26.9%. That’s not normal.
“I would say if you can’t handle this little bit of volatility, you shouldn’t be investing in stock,” says Allan Roth, founder of Wealth Logic, an investment advisory and financial planning firm, and a columnist for AARP. Roth suggests that if you have the balance of stocks, bonds and cash that you’re comfortable with, just stop looking at the market’s daily activity and your balances. (He acknowledges he is a hypocrite in that respect.)
The huge day-to-day swings are partly the result of algorithms, meaning there are formulas that can magnify any musing into a big change in price. But history — and that’s really all we have to go by — tells us that big swings are associated with recessions.
If your investments need rebalancing, consider doing it, Roth says. He suggests trying to keep your investments within 6 percentage points of your goal. For example, if you intend to have a 60/40 balance of stocks and bonds, and stock market losses leave you with less than 54% in stocks, it may be time to rebalance.
But here’s whose investments don’t — or at least shouldn’t: people who invest in target-date retirement funds. If your portfolio — or at least most of it — is invested in a 401(k) or 403(b) through your job, your target-date mutual fund should be making adjustments for you.
Normally, stocks and bonds move in opposite directions. Right now, they’re both in corrections, meaning down by at least 10%, so the “protection” of having both is gone. But this hasn’t happened in 50 years.
PLAYING THE LONG GAME
Still, investing is a long game. The high inflation coupled with a worrisome stock market is not likely to stick around forever. “We’re betting on capitalism to continue, and there’s no guarantee,” says Roth, “but chances are it will.”
What’s causing the craziness we’re experiencing? Lots of things. When COVID-19 arrived and we were justly worried about the economy, the U.S. government responded with stimulus checks, the Paycheck Protection Program, along with student loan and mortgage relief. The Child Tax Credit put money in the hands of parents. There were a lot of dollars out there . . . and thanks to COVID and war-related supply chain shortages, not a lot of goods to buy. That’s a recipe for inflation. Add in the Russian invasion of Ukraine and the resulting economic upheaval. This is not a situation anyone has ever seen before. So the solution is anything but clear-cut.
Federal Reserve Chairman Jerome Powell has acknowledged a tricky situation and “blunt tools” available to correct it, and Fed tightening has limited power and a dismal record. Eleven of the Fed’s last 14 tightening cycles since 1950 have ended in recession, notes Lisa Shallet, chief investment officer, wealth management for Morgan Stanley.
And like a 2-year-old, the market has dramatic, loud, opinions that change.
WHAT TO DO
So, what do you do? The best answer is often doing nothing.
It’s a good time to check to be sure you are diversified and, as Roth suggests, go ahead and rebalance if needed. If you are young and just beginning to save for retirement, don’t be discouraged — history suggests the deposits you are making now will see a big growth spurt. On the other hand, if you plan to retire soon, you may want to keep more cash, so you don’t have to withdraw money from a shrinking nest egg. And once you have done what you can, stop checking your balances so often.
“I guess my advice would be . . . you can’t ignore your instincts, but you can try to not act on your instincts,” says Roth. That would be because our fear-driven decisions tend to be bad ones.
“When I bought stocks in March 2020 [during the 33-day bear market]. . . . I’d be lying through my teeth if I said, ‘Oh, I’m buying them on sale . . . they’re gonna quickly recover.’ It was a hard thing to do. And I teach behavioral finance.”
- How to Handle Sudden Stock Market Moves
- How to Ensure Your Retirement Savings Lasts as Long as You Do
- Podcast: How to Overcome Your Fear of Investing