Why You Should Stay Invested in Down Markets
2022 was not a pleasant year for investors in bonds or stocks. The reasons varied – recession fears, Putin’s brutal shenanigans in the Ukraine, COVID-19's multiple variants, and the Fed constantly raising interest rates in its battle against inflation. 2023 brought happier times until August and some off-putting moments in September and early October appeared.
That's when tried and true investing principles - Patience, Diversification, Quality - come through for you. Although chaotic markets are stressful, they can positively affect your investment portfolio. Here's a refresher on the benefits of staying invested and holding true to the investment pattern you practice during a more rational market.
Market "Sales"
Down markets almost always presents important buying opportunities. In my mind, a down market is equivalent to a sale. And how does an investor take advantage of discounted prices? By staying in the market - not cashing out and running.
If you’re already contributing to a 401(k), IRA, or personal investment portfolio by automatically investing cash or capital gains and dividends, keep on trucking while the sale is on. There are potential gains to be made when you automatically contribute cash, capital gains and dividends in your IRA, 401(k)s and personal accounts during a market downer. In fact, in the long run, buying low will likely prove to be very beneficial.
Investing at discounted prices exposes you to the future growth potential of those investments you’ve already considered to be good ones.
Risk Avoidance
The value of staying put (not acquiescing to the siren call that urges investors to sell) cannot be overstated. And now is a good time to do just that - to reassess the value of buying and holding. Are you seriously considering vacating today’s market because you feel like it’s going to keep declining? Before doing so, answer this question: How will you know when the market is about to rally?
In short, when do you get back in you face the conundrum of having to be right twice – knowing when it's right to get out and when it's best to reenter.
History informs us that market rebounds are often quick and unannounced. When you sell into a down market, you often create real (as opposed to paper) capital gains (taxes), and real (as opposed to paper) losses. Be ever mindful that you haven’t lost anything until you sell. And because you can’t be certain when markets will recover, you risk missing out on a resurging market if you stop adding to your various investments…not to mention the opportunity costs related to those investments you sold. It’s not unusual for people to sell in a panicked state and then delay reentry into the market until prices are elevated…if they ever return at all.
To enjoy the benefits of a subsequent strong market, you need to be there when it's selling off. As conservative investors so often preach, there’s a difference between trying to time the market and spending time in the market. Which brings up two key points. Historically, the stock market has always recovered from downturns - the average Bear Market lasts only about 1.3 years. When investors experience these downturns, they must remind themselves of this fact and replace panic with patience, based on the stock market’s long track record of ultimately recovering and growing.
Tax Advantages
In addition to buying opportunities, a Bear or oversold market presents income-eligible investors who have made pretax investments in 401(k)s or IRAs with unique opportunities to convert all or portions of those traditional investments (assuming they are down in value) to Roth accounts. Such conversions involve the usual guesstimates about an investor’s personal tax rates today versus in retirement. But if investors elect to do the conversions when the market rebounds, they will have funds in retirement that have already been taxed…thus, the money contributed to retirement accounts and its earnings can be withdrawn tax-free in retirement.
Words of Encouragement
Without question, inflation has taken its toll on investors. History has shown, however, that markets outperform inflation over time. But even during those periods when inflation continues to edge up or remains “sticky” at undesirable levels, generally speaking the market increases to support the broad array of underlying investments.
Because it’s virtually impossible to know when market volatility might end, investors are often tempted to take action to mitigate purchasing power losses. That’s when the importance of patience and discipline come into play during chaotic times like today’s marketplace. But history shows that patience and discipline…along with owning low-cost, highly diversified, quality investments… usually pay off.
By the way, one good approach to fortifying your own “patience quotient” is to set aside an emergency fund of 6-18 months of easily accessible cash to help navigate unexpected or lengthy financial hardships.
And remember, this current untidy market, too, shall pass.
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