Overview: The best way to attain good returns is to buy low and sell high. One can accomplish this with a buy and hold strategy. Expect volatility, major ups and downs, and large market corrections. Expecting large drops helps curb the natural impulse to sell at the wrong time. Buy and hold does as well. Stay the course and play the long game.
Now that you have a good mix of high quality index funds that you contribute to each month as you save for retirement, it’s time to stay the course. It has often been said that the biggest detriment to your retirement savings is staring at you each morning in the mirror.
When the market drops, emotions run high, panic sets in, fear takes over and you end up doing the worst thing you could do: sell. The buy and hold strategy is very proven, but for it to work, you actually have to buy and hold. The worst time to sell is when the market is dropping, outlooks are bleak, and the world economy is tumbling (2001/2008/2020). This is especially true as a new retiree. As John Bogle has said when the markets are dropping: “Don’t just do something, stand there!” It can be tough when your family, neighbors, and the financial media are all squawking in your ear that you are crazy to be buying. I’m reminded of Mr. Potter. “When everyone else was panicking, he was buying.” Why? Because he was smart and had seen all this before.
Another good reason to buy quality index funds instead of stocks is because when the market tanks, some or many of your amazing stocks may disappear completely. Index funds get removed for poor performance too, but not nearly as many. Buy and hold works for the long run, but only if those funds exist after a market downturn. Look for passive index funds to remain when hot tech stocks have vanished into the night.
Human nature is a funny thing. We love to buy things on sale or when they are cheap, except for stocks. The next correction may be just around the corner, but remind yourself that the next correction means things are simply going on sale. Stay level headed and rational. Always look to your investing plan when times get tough. That’s why you wrote it in the first place. It will remind you to sit on your hands for a few months to make sure you really want to sell that fund that is dropping. After you’ve settled down, remember that stocks are on sale.
Remember, too, that corrections are both normal and expected. Anticipate a 10% correction at least once a year and 20% corrections every 3-4 years. They only matter to short term investors. If you can remember to see things from a longer perspective, they aren’t bad at all. In a taxable account, they offer a chance to Tax Loss Harvest (TLH). TLH is where you sell funds for losses, then buy similar funds and deduct up to $3,000 off your taxes that year. Got $18k in losses? Deduct $3k each year for six years! Uncle Sam will share the pain of your loss, but it’s not really a loss if you don’t cash out.
I’m actually hoping there is a market downturn in the near future. Why? Because downturns lead to larger gains. “Trees don’t grow to the sky” and large dips are a chance to reset and make even higher returns. Bill Bernstein reminds people of this in his excellent 42 page book The Ages of the Investor. He relays this simple example:
Remember to be fearful when others are greedy and greedy when others are fearful. When there is blood in the streets, it’s a great time to buy.
Dieting is simple, but not easy. It’s the same with investing: It’s simple, but not easy. Simply stay the course.