The stock market is down 20% this year. A discerning eye may recognize this as not great! It’s not all doom and gloom though – and certainly not a time to sell off all our investments. Instead, this bear market presents another opportunity to reevaluate our personal risk tolerance. Let’s go through the difference between this crash and the last one. Then we can sort through the psychology behind investing and chart a course forward.
Risk Management for All Market Seasons
Over the past two years or so, we’ve had a flash crash, a crazy bull market, and an extended bear run. How you reacted emotionally to these events should guide your investing strategy. The best investing strategy is one that you can stick to no matter what the market is doing in the short term. The market crash at the onset of the pandemic produced two different reactions in me. First there was the gut feeling that my portfolio had dropped by so much so quickly. But the second feeling was one of opportunity. I invested as much as I could and invested the entire first stimulus check that I got. Then during the crazy bull run, I used dollar cost averaging to buy into the market incrementally. I even set up some automatic contributions to my Roth IRA so I wouldn’t be tempted to break from my strategy. For the past 6 months, I was generally aware that the market was doing poorly. However, I haven’t changed my strategy at all. I’ve continued to dollar cost average my way into the market. This is how I know my investing strategy is sustainable: I haven’t changed it depending on what kind of run the market is on.
No Reaction is the "Right" Reaction
Now we get to that pesky “personal” part of personal finance. My reaction to the recent market badness is not necessarily the “right” one. It just means that I’ve found the investing strategy that works for me. If you are currently losing sleep over the market being down 20%, then you should probably change your investing strategy. Invest in some bonds (I Bonds are pretty great at the moment) to reduce the amount your portfolio will drop when the market goes down. The goal of investing is to make money AND sleep at night. You need both to be successful. Let’s make sure we aren’t being hasty here though. Do not panic sell your whole portfolio and hoard cash. Simply rebalance your portfolio to your chosen stock-bond ratio. Part of the upside of stocks is that there is short term volatility – meaning there will be plenty of times when the market will be down.
Then Stick to the Plan
Every investor needs a portfolio that lets them sleep at night when the market is down 20%. Once you have it, you need to stick with it. That can be difficult to do when the market is on fire and those bonds in your portfolio are looking pretty lame. Pushing all your chips into stocks will result in the same panic when the market inevitably drops again. Right now, I’m doing fine even though my portfolio is invested in all low cost index funds, including my TSP. I’m confident in the long term (30 years+) success of the total stock market index and I’m able to sleep at night. In other words, my investing strategy doesn’t need to change right now. I’m still a newer investor, so my contributions are mostly keeping my portfolio stable. Maybe sometime down the road when a 20% drop hurts more I’ll have to re-evaluate. But for now I can still sleep easy, even when the market is down 20%.
