Are stocks crashing?
Yes.
Do we know why stocks are crashing?
No.
Come on, you can tell me. Why are stocks crashing?
Because they’re going down.
Don’t get clever with me.
Seriously, it’s because they’re going down. The most powerful force in the stock market is something called “momentum”. If stocks are going up, then they will most likely continue to go up today, and tomorrow. If stocks are going down, then they will most likely continue to go down. What we’re seeing right now is one of those rare wrenching moments when stocks stop going up and start going down.
So, if stocks are going down, I should sell my stocks?
NO!!!
Your stocks are long-term investments. (If you’re not holding them with a time horizon of at least a few years, you shouldn’t be invested in stocks at all.) Over a period of years, stocks have done great, and, looking forwards over a period of years, stocks are likely to continue to outperform anywhere else you could have your money, like bonds or even real estate.
Here’s what the US stock market has done of late. You see that blip at the end? That’s what everybody’s freaking out about today. But with the S&P 500 at 1900, it’s still higher than it ever was before June 2014.
Some people try to hold stocks only when they’re going up, and not when they’re going down. Those people are known as “market timers”. Market timing doesn’t work, and even if there were one or two people out there who could make it work, you’re not one of them.
Besides, why would you sell now, when stocks have just crashed? You’re meant to sell high, remember? Not sell in the midst of market craziness.
Ha, j/k. I don’t have any stocks. I’m feeling pretty good about that, today!
Don’t feel too good. Remember that chart? If you put $1,000 into a boring index fund fund just five years ago, you would have doubled your money by now. Even if stocks lose 10% or 20% or 30% of their value in a high-profile crash, you still end up ahead. Owning stocks is probably not going to make you rich. But not owning stocks is even worse.
That said, if you’re the kind of person who checks your balances on a regular basis to see how much money you have, or if you think you might need most of your money to, say, buy a house, then staying out of stocks is entirely rational. And if you have any kind of debts – student loans, say – which carry an interest rate of more than 5% or so, you should definitely pay down those debts before even thinking about investing in stocks.
So… if I shouldn’t be selling stocks right now, should I maybe be buying?
Sure, why not. If you have money you can afford to put away for at least five years, and you promise not to panic if the markets go down, then feel free to jump in and buy some stocks in the next few weeks. You’re getting them at a decent discount to where they’ve been trading of late. But if days like today make you nervous, then it’s perfectly reasonable to stay out of the market. Not everybody needs to be in the market.