The stock market is in free fall, the housing market is slowing down, and Dana White is threatening to make a welterweight title fight at UFC 235 with or without Tyron Woodley, despite Tyron being the four-time defending champ who defended the belt in September.  Madness.  Yes sir and/or ma’am, it looks like the world is ending.

In the grand scheme of things the stock market isn’t in free fall but has merely stepped off a small curb. That kind of level-headed approach won’t move any papers, so free-fall it is.  How are we all feeling about the stock market’s recent decline?  I feel great.  At one point we had personally lost at least $50,000 from December 3rd-December 24th.  Wait.  Son of a…

If you’re unfamiliar with market behavior, you probably whole heartedly agree that it’s a great tragedy that we’ve lost all this money.  If you’re familiar with how the markets work, you realize that we haven’t lost anything, unless we panic and sell.

We invest in Vanguard Total Stock Market Index Fund, VTSAX.  Currently, the price per share of our investments is down from what it was a few weeks ago.  But, the market always rebounds, if you have the patience to wait for it.

The Storm is a Comin’

Think of the market like weather.  When the market is going up it’s a sunny day.  When the market is going down, it means stormy weather.  Depending on how you view investing you’re either disheartened when you see storm clouds building, or you’re anxiously waiting for the downpour so you can cash in.

How can you cash in?

Every time there’s a decline throughout the life of the stock market people’s natural reaction is to panic and sell.  When people sell it drives the price down. When the price is driven down it means you’re able to buy the stock for much less than people are willing to pay for it when the market is going strong.

The following is an example with obviously exaggerated returns and dips using round numbers for simplicity’s sake.  

Pretend you have a portfolio of 100 shares worth a total $10,000, or $100 per share.  When the market declines that portfolio of 100 shares is now only worth $8,500, or $85 per share.  Conventional wisdom is you need to sell RIGHT NOW before it’s worth only $7,000.

The problem with this is you’ve locked yourself into a $1,500 loss.  The rain isn’t going to last forever.  Maybe the decline lasts for an exceptionally long time and your $10,000 worth of stocks is now only worth $5,000.  In that case, you’re probably pretty proud of yourself for selling when your portfolio was at least worth $8,500.

But, maybe that 15% decline was the worst of it and the market immediately rebounds.  If you sell at $8,500 then you’ve lost $1,500 plus you have to buy back in. Because the market rebounded to its original position, that $8,500 you cashed out buys you only 85 shares compared to the 100 shares you would have had if you had just not sold to begin with.

You Can’t Time the Market

If someone tells you they can time the market they are lying to you. They can’t.  Nobody can.  We have no good way of knowing when the market will go up and when it will go back down.  We have experts, but they are about as helpful as your local weatherman.

Eventually, the rain will stop and the sun will start shining again.  Given enough time the market always goes up.  If you stay the course and don’t sell your $10,000 portfolio for pennies on the dollar, it will eventually climb back up to $10,000 and beyond.

Remember, you still have 100 shares.  They’re just temporarily worth less than they were before.

“I’m Just Going to Time the Market.  Buy low (wink, finger guns). Sell high,” Someone Fixing to Lose all Their Money

The natural reaction to a downturn in the market is to get out while it’s going down, figuring you can always buy back in when it goes back up.  The problem with this line of thinking is you need to be right twice.  You need to 1) sell at the peak (or close to it) and 2) buy back in at the bottom.

This is highly unlikely as the market doesn’t tend to be predictable.  Let’s pretend you sold your once $10,000 portfolio at $8,500 and now that same portfolio is worth only $5,000.  Do you buy back in now?  How do you know $5,000 is the bottom?  Maybe you should wait a little while longer to see if it goes down even further.

The Next Day:

Great news, the market is on its way back up!  That $5,000 portfolio is now worth $6,000.  Shoot. Should have bought yesterday.  You immediately buy back in at $6,000.  You’re an investing god!  You sold at $8,500 and bought back in at $6,000.

But then- it turns out that uptick was just a blip.  The market is still in recession and now that $6,000 is back down to $4,500 by the following week.  Do you sell again and again realize a loss of $1,500?

You decide to hold your investment this time but the market keeps going down.  It goes down so far until your $10,000 initial portfolio is only worth $3,000.

You’re in a real predicament now.

The Next Few Months:

Everyone around you panicked and sold like crazy to limit their losses.  The market tanked and people were happy to get what they could.

Over the course of the next few months, the rain stopped pouring so hard and the sun started peaking back through the clouds.  The market started to rebound.  That $3,000 portfolio is now worth nearly $7,000.

Your colleagues all sold when the market was at $3,000 because they were afraid of losing any more money.  Some of them are scrambling to buy back in for more than double what they sold at.  Others are afraid this is still a blip and the market will go down even further.

A few more months pass and the market is on fire.  That $10,000 portfolio that fell all the way to $3,000 is now worth $12,000.

Those same people who panicked and sold at $3,000 are now eagerly buying back in at $12,000 because, “You can’t help but make money in a market this hot!”

Obviously, spending 4x the amount for the same product is not a smart business move.

What Should You Do Instead?  

Back to reality.  In late 2018 the market is going down and nobody knows where the end is.  It’s not quite panic time but it’s getting close.  We see dark clouds on the horizon.

It looks like 2019 might bring another recession.  Seems like getting out of the market altogether is the smart play.  The trouble is knowing when to get back in.  We know the storm will not last forever but surely standing outside getting rained on isn’t the smartest idea in the world.

Mr. Burrito Bowl’s Official Advice:

Want my advice? Of course you do! Do nothing.  You are not in the storm, the storm is just a passing phenomenon. Don’t panic.  Don’t sell off your assets for a lower price than you bought them for.  In fact, buy more.

Huge Sale- Stocks Up to 30% Off!!

Investing is the only time people aren’t excited about a sale.  Right now you can buy more shares of Vanguard VTSAX for the same amount of money than you could have a couple weeks ago.  That’s great news!  Why would you sell right now? It’s starting to rain, don’t run inside.  Instead, grab your buckets and head out there to collect all these discounted stocks.

Since you can’t know the bottom or the top of the market, the best idea is to keep investing just like you always have.  Yes, the market might keep going down for a while and you’ll feel like you’re losing money.  You’re still buying more shares.  You aren’t losing anything until you sell.

The number of shares you own is what matters, not what those particular shares are worth at any one time. If you don’t plan on needing to cash out anytime soon then there’s no reason to sell.

If you do plan on needing the money in the next 5 years, then you shouldn’t be investing it.  Investing is meant to be done for the long-term, not the short-term.

If you know you’ll want the money in the next few years consider putting it in a high interest savings account.  We use Ally Bank for ours because they give you 2% interest and you can get the money out in a day or two.  It’s not as good as investing but it will help keep up with inflation.

Be Greedy When Others are Fearful, and Fearful When Others are Greedy- Warren Buffett

When the market is at a low point, the uncertainty makes people want to sell. But, that’s precisely the time you should be increasing the amount of money you’re putting towards your investments.  You’re getting stocks that other people paid $100 for at half price.  Hooray!

Since we can’t know the high point or the low point, the best piece of advice is to not try and time the market.  Just stay the course and keep investing.  The more you invest the better off you’ll be in the long run.

Remember, on a long enough timeline the market always goes up.  If the market bottoms out to zero than our currency is worthless anyway and we’ve all got much bigger problems.

In closing:

I don’t know if I’ve said this or not but don’t try to time the market.   Often times the biggest days of growth for the stock market happen directly after the biggest losses.  December 24th was a new low point and on December 26th we had one of the biggest single day gains in history.  If you panic and sell when the losses occur, you’ll most likely be on the sidelines during the biggest gains.

Here’s a chart of how returns of the S&P 500 look from 1995-2014.  Notice how much less your portfolio is worth if you missed the 10, 20, 30 etc. best days over that period.  Here’s the full article from business insider.

What’s This Chart Mean?

This chart shows that if you had left $10,000 in the S&P 500 from January 3rd, 1995-December 31st, 2014, your initial investment would be worth over $65,000.  If you had jumped in and out of the market and missed the 10 biggest days, your investment would be worth less than half that amount.  Think about that.  Missing the wrong days for a total of less than two weeks over twenty years cuts your overall returns in half.  Yikes.

Because we have no way of knowing when the best or worst days will be, it’s best to sit tight and stay in.

News is purposefully sensational because nobody listens when the leading story is, “Everything is Fine, Do Nothing.”  Ratings rule everything and people are more likely to tune in to hear bad news.

You might hear cable channel experts warn that it’s time to sell off.  Relax.  It’s theatre and purposefully sensationalized in order to get ratings and keep the 24 hour news cycle going.

The math says to stay calm and keep investing.

When all else fails, remember this:

Timing the Market is not nearly as Important as Time in the Market.

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