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Nine Ways to Be Smart When the Market Goes Down

Wealthsimple is a whole new kind of investing service. This is the latest installment in our "Data" series, where we dig into the numbers to learn more about how the world of money works.

Did you know the stock market just celebrated a superimpressive birthday? The bull market turned eight, which makes it the second longest bull market ever. If the bull market were a child, they would be bugging their parents for their own iPhone by now. Sure, there have been dips, but if you've invested money in the last eight years (unless you bet all your money on stocks; you're not betting all your money on stocks are you?), it's fairly certain that you've seen the bottom line in your portfolio go in one general direction: up. Since 2009 the S&P 500 has risen 259 percent.

259 percent. Pretty amazing, right?

But there's a catch. It's called history. And history says that bull markets don’t last forever—a bear market has followed every bull market since people invented phrases like bull market and bear market. (A bear market, by the way, is defined as an extended period of losses during which the market falls 20 percent or more.) No one knows when a downturn will happen, or how long it will last, but pretty much everyone agrees it’ll happen at some point.

So, it's coming! At some point! Maybe! But what should you do when it does? Sell everything and hide in a bomb shelter? Put all of your capital into Beanie Babies and Russian rubles? Well, in short: no. Don't do any of that. Because another of history's lessons is that if you panic, you're going to miss out.

There's a right way and a wrong way to go through a downturn. Lucky for us, the right way is far easier.

1. Do not panic, unless you like losing money. Whenever the bear shows up to the party, he inevitably causes the natural emotional response anyone would feel if a ferocious wild animal wandered into a social gathering—panic and fear. All of those gains obliterated! Savings decimated! The world is ending! Sell everything! Hide the clam dip! This is a good way to make sure your losses stay losses.

Don't believe us? The graph above shows what would happen if you’d invested using one of two scenarios. In the first, you do nothing. In the second, you employ what's been called a panic-selling strategy—sell everything when the market drops more than 2% in a day, and then buy back 20 days later if things are looking flat or better. It turns out the guy who lost the password to his brokerage account would have done better. By a lot. And that's not including transaction fees.

2. Remember your timelines. If you’re saving for retirement, but you don't plan on retiring in the next decade, stop looking at the short term. What happens now shouldn't really matter to you. It's what the longer-term trend line looks like that matters. And the long-term trend line for all markets since forever has been up. What you're betting on when you do passive investing is human progress. If you stop believing in that, you'll have bigger problems than bad portfolio returns. Which leads us to:

3. Remind yourself that bear markets have historically been shorter than bull markets. Since the 1930s, bear markets have lasted an average of only 18 months. The average time it’s taken for a portfolio of stocks to both endure a bear market and fully recover its value has been just over three years.

4. Do not try to time the market. DO. NOT. TRY. TO. TIME. THE MARKET. Everyone knows that the goal of investing is to buy low and sell high. So if the market’s bound to go down sooner rather than later, why not liquidate your investments, and after the inevitable downturn happens, snap up all those bargain-priced stocks? You may be smart. (You found us, after all.) But, no offense, you’re probably not smart enough to perfectly time the stock market. Why? Because no one is really that smart. Not even Warren Buffett, who likes to remind smart investors to stay the course, and stay invested, despite any market fluctuations. Research shows that trying to time the market more often than not leads to worse returns. The steady-as-she-goes investment strategy beats pretty much everything else.

5. Find an investment firm that can set up automated deposits so you don't have to think about it. The best way to take emotion out of investing is to automate it.There are places that take the decision-making out of your hands and apply simple, cold logic and a little something called automatic deposits. Wealthsimple, you'll be unsurprised to find out, is one of these places.

6. If you're a new investor, automatic deposits are doubly important. Here's the thing about starting to invest: new investors tend to be way more emotional than old hands. Which means that, when the market goes down, they tend to freak. Freaking = bad. That much we've established, right? So if new investors can take the decision making (should I put more money in? Should I take my money out?) out of the process, and just keep making small, regular deposits regardless of what the market is doing, it's a great help in riding out the short-term gyrations of the market.

7. Here’s the most important piece of advice we can offer. Do absolutely nothing.

8. Especially if someone (like Wealthsimple) is automatically rebalancing your portfolio. After any market drop, your portfolio will inevitably get a bit lopsided. A balanced portfolio of equities and bonds might suddenly appear too bond-heavy, since bonds tend to lose less value during downturns. And here’s the beautiful part about Wealthsimple—in good times and bad, we automatically rebalance your portfolio periodically to make sure these ratios remain consistent and you’re never too exposed in any one investment sector.

9. Log off your account, relax, congratulate yourself on your shrewd financial decision, and tune out all the doomsayers.

Wealthsimple makes smart investing simple and affordable.


Sources:

Graph 1. Definition of panic-selling derived from Savita Subramanian at Bank of America Merrill Lynch

Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money. Invest, save, trade, and even do your taxes in a better, simpler way.

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