How to Deal with (Stock Market) Losses Without Losing It
A few million investors suffered stock market losses during the first month of 2022 after the S&P 500 index turned in its worst monthly performance since the pandemic's early days in March 2020. A fellow investor and subscriber asked me for my thoughts on how to handle January's losses. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Q: I lost lot of money in the stock market in January. How do you deal with big losses?
You and a few million other folks suffered correction-type setbacks in January. Yes, I know, the pleasure of their company is not necessarily comforting. But you’re not in this alone.
First, it helps to dig into the reasons for the recent downturn. From the S&P 500’s March 2020 lows to its all-time high of January 3, 2022, the index soared 114%, and that was despite a once-in-a-century pandemic. Face it, the stock market has been extraordinarily good…and yes, overvalued…for quite a while. Much of these recent good times were delivered to us by the Federal Reserve…low interest rates and truckloads of monthly bond buying.
But change is in the air. The Fed is now giving us gas pains by signaling rate increases and reducing it massive bond inventory. And the federal government’s dump of trillions of stimulus dollars into an economy didn’t hurt the stock market’s momentum…lots of cash, lots of demand, disruptive supply chains.
Face it, the stock market has been extraordinarily good…and yes, overvalued…for quite a while.
The country’s natural response to the Fed’s pending series of rate increases - and the failure of Congress to pass additional stimulus legislation - had an immediate negative impact on the stock market. The S&P 500 recently fell 6.5% from its peak - even after investors learned of a very healthy 2021 GDP report, positive employment numbers, and blowout earnings from Apple, Microsoft, and the large energy companies. Growing evidence of persistently high inflation and those anticipated Fed rate hikes took their toll on both investor and consumer confidence.
In addition, the pandemic shadow, though seemingly under control, still looms. Geopolitical tensions are on the rise in the Middle East, Eastern Europe, and the Far East. And those global supply chain issues are yet untangled.
For all of these reasons and more, when the market goes down we feel poorer and tend to spend less…the old “wealth effect.” We’ve long enjoyed the list of things that cause bullish market trends and their comforting impact on retirement portfolios, non-retirement accounts, and other forms of financial well-being…inspiring folks to spend their wealth more freely. But in coming months, we’re liable to experience a bit of a tug-of-war regarding how investors react to the anticipated Fed actions related to burgeoning inflation…and the extent to which the Fed ignores…or reacts…to investor reactions. We investors will probably suffer more losses - on paper, if we don’t panic - in 2022. But if you’ve been a follower of my blogs for very long, you already know my reaction to both January and future setbacks.
We investors will probably suffer more losses - on paper, if we don’t panic - in 2022.
So, how should you deal with current and future losses? Consider how you've dealt with them in the past. If you stuck to PDQ Principles…patience, diversification, quality…and built your portfolio around a low-cost, high-quality, highly diversified Total Stock Market Index mutual fund. you probably weathered this storm with minimal stress, knowing that your patient approach will permit you to ignore the thundering herd as it most assuredly scrambles for the exits. All the while enjoying the benefits of the Amazing Power of Compounding while the Federal Reserve goes about taming Izzy the Inflation Monster.
But if you didn’t exercise patience, odds are you took gains you might not have otherwise taken (creating a premature taxable event); converted paper losses to real losses, perhaps unnecessarily; and now you have to figure out when to reenter the market, possibly absorbing losses by missing most of a recovery due to reentry wariness. As I’m inclined to remind folks, recoveries inevitably follow corrections.
Don't fret your losses. 2022 is supposed to bring market volatiity. More specifically, the Federal Reserve has telegraphed several rate hikes to combat the current high rate of inflation. Remain patient - don't panic - and remember the market always - ALWAYS - rebounds.