How Can I Keep Calm When The Stock Market Is Bullish?
“He can’t lick his butt- that’s why he’s got an infection and losing weight.”
I hope she’s talking about a dog, I thought.
As I walked by and heard more of the phone call, it turned out that the woman was a vet, and she was on the phone with a client. Both humans and animals often have medical complications- one issue can cause multiple problems. A patient has bad teeth, for example, and doesn’t eat well. He loses weight and starts having problems, related to poor nutrition.
Problems compound- and we all should avoid compounding problems when we invest.
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Which brings up to this question: How do you stay calm in this roaring, record-setting bull market?
What was your investing goal?
For starters, go back to the reason you started investing in the first place. Specifically, how much money were you trying to accumulate, and for what purpose? How long were you planning to invest?
Let’s assume, for example, that your investing now in a 401(k) retirement account, and that you’re 25 years from retirement. You’ll willing to take a moderate amount of risk. If your portfolio is up or down 10% in one year, you can live with it. A 25% change, however, makes your palms sweaty. You invested in mutual funds, with 70% in stock and 30% bonds.
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That’s the plan- and that’s where you start.
If you’re recovering from a financial setback, this article may help.
Just how much have markets increased?
As of this writing (1/22/18), the Dow Jones Industrial Average (DJIA) closed at an insane 26,214.60, up 32.4% in the last 12 months. The DJIA is an index of 30 large corporate stocks. A broader index, the Standard and Poor’s (S&P) 500, closed at 2,832.97 today, and this is an index of 500 large stocks- a bigger basket of stocks. The S&P 500 is up 24.7% over the last 12 months.
Crazy, record-setting performance… and it’s stressful to consider the fact that every bull market ends.
Keep your head- when everyone around you is losing theirs
It may seem like everyone around you is getting rich- but that’s normal. In every bull market I’ve seen since the ’87 market crash, most of us think that everyone else is making a pile of money.
But there’s a trade-off. The people who are really killing it in the markets these days are taking more risk (Bitcoin, anyone?). They either have larger percentage of their total portfolios in stock (vs. bond or cash), and they’re buying riskier stocks- stocks that have less of a performance history of earnings and sales.
You need to keep your head and realize:
- Your goals haven’t changed
- Bull markets, historically, come to and end at some point
- When (not if) the bull market ends, you may incur some losses in the short term
But you can get through it.
Back to reality
So, what’s a “normal return” on stocks, if such a number exists? Seeking Alpha (a site I highly recommend) has some great stats on historical returns for the S&P 500 from 1928 to 2015:
- Over 88 years, the S&P 500 went up 64 years and went down 24 years.
- The worst return was -43.84% in 1931 (ouch) .The best return was 52.56% in 1954.
- The mean return (think average) was 4122%
So, what’s normal? Seeking Alpha says 11%, and other stats suggest 8-10% over a 70-80 year period. The point is that 24-32% isn’t normal.
My answer
Buy quality stock mutual funds, and reduce the percentage that stocks make up of your total portfolio as you get closer to retirement. Maybe you move from 70% stocks, down to 60%, 50% etc. and move that money into bonds. Ride out the short term swings in stock prices and earn about 10%.
Well, I feel better, anyway.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl
This post was originally posted on my Quora page. This post is for educational purposes only.
Image: Bullseye, Jeff Turner CC by 2.0