SAVE YOURSELF: When stocks fall, think about saving or doing nothing

SAVE YOURSELF: When stocks fall, think about saving or doing nothing

October 24, 2023

The following column was published March 1, 2022 in the Arkansas Democrat-Gazette.

So the stock market has taken a small tumble. What now? Could it take a bigger tumble? Could it rocket to the moon? The real question you might be asking yourself is, "What should I do with my investments?"

I have one definitive answer for you. Absolutely nothing.

"But, SC," you say, "I feel the need to take action. Everyone else is doing something, like 'going into cash' or buying Bitcoin. I don't even know what all that means, but I can't watch the balance in my retirement account go down."

You want to do something?

Don't mess with your investments. Don't move into cash. The only thing that would make sense at all right now would be to save more into that retirement plan.

What? Are you crazy? So you press on and explain that you don't understand the stock market. You would rather put that money somewhere safe like your savings account or paying more on your home mortgage.

Ohhhhhh, yes. It makes sense that you don't want to invest in something you don't understand. So let's go about the business of understanding the stock market, without the jargon. Then I will explain why this is the time to either take no action or save more.

The stock market sounds like one "investment" to choose from, as if there is a huge buffet out there, but that's not right. The stock market is more like a huge chunk of the world economy. In fact, you already cast votes for the stock market every day, just in a different way. You BUY STUFF in that economy.

Don't believe me? Let's say you are reading this article on your Apple iPad, accessed through an AT&T internet. You agree with the article and then you call your HR person on your iPhone accessed through the Verizon network to increase your retirement contribution. They don't answer, so you grab your keys and jump into the Toyota Prius to drive to your HR department and do this in person. But in your panic, you see you are out of gas, so you stop at the Shell station to fill up. In the 5 minutes while you wait, you scroll through Facebook and see an ad for the perfect new chunky knit pouf decorative footstool at Target selling for only $65. You click on it, find the right color and in one click of the PayPal button, that pouf is instantly boxed up with a UPS label, scheduled to arrive in 3 days.

In 30 minutes, you have financially interacted with 9 companies – all represented in "the stock market."

So it's odd to me when people who "pass" on the stock market don't think they are involved. There is a fundamental misunderstanding. Imagine saying "pass" to buying stuff or services from companies in the stock market. It wouldn't be possible. You could not live your life without buying their stuff.

All I am asking is that you turn the equation around. Instead of reducing your wealth by buying stuff or services produced or sold by companies traded in the stock market, consider buying less stuff and owning the companies in the stock market that other people are buying stuff or services from, thus increasing your wealth.

"But the market is too scary. I don't want to lose my money."

Fair point. But let's think about this for a bit. We all have to spend money to sustain our lives and life styles with food, shelter, clothing, etc. But many folks reading this have discretionary funds that allow them to make nonessential purchases.

Take the pouf. You had $65. You bought the pouf. Then "poof" your money is gone.

Alternatively, you could just keep using the coffee table as a foot stool and put that $65 into Target stock. Sure, the stock price could decline, perhaps meaningfully over short periods of time. But also, the stock price could go up over time as the company grows earnings.

(This is where I want to insert that I am in no way encouraging you to buy Target stock or any other individual stock.)

When you buy stock, you own a piece of the company. How much? Well, in proportion to how much stock the company has. You are a tiny, fractional owner, but what's cool is that you get all the benefits of being an owner with none of the hassle of running the company. So when the company makes money you make money, through quarterly cash payouts and/or the value of the company growing, which in turn can make the value of each of your shares grow.

But how do you choose which stocks to buy? You actually don't have to choose. In fact, please don't.

Buy them all!

Here's how that works. You can buy an index mutual fund. This is a company that recognizes that you have a day job and can't spend all day buying a small piece of roughly 10,000 stocks in the global stock market! So they do it for you. You decide how much money you want to put into all those stocks, and they use the money to buy them all for you! A mutual fund is a fund that buys stocks or bonds (we'll get to those another day) or both on your behalf and on behalf of lots of people who also don't have time for sorting out how to buy stocks.

Previously all those mutual funds were managed actively, with very smart people trying to pick only the best stocks for you. Turns out that was quite the fool's errand, so increasingly people began buying into index mutual funds that don't pick stocks -- they buy a weighted average of all the stocks represented in the indexes. An index is simply a way for people to group stocks, for example, based on how big they are or the type of company they might be. You can buy groupings of big, medium and small sized companies. You can buy retail companies or oil companies. I love the simplest indexes that buy the entire US market or the entire international market.

The coolest part? Those index mutual funds are now found in most retirement plans.

So now you know exactly what you are buying when you invest in the stock market through an index mutual fund.

The final question is when to buy, or when to sell.

When you buy into the stock market inside your retirement plan at work, you are investing money in the market for decades. Yes, the stock market has had blips, tumbles, "corrections" or "crashes" in the past and will likely have more.

Our most recent declines were in 2008/2009 and 2020. Anyone invested in the whole market who watched closely saw their balances in retirement accounts take devastating plunges but then recover and go on to eventually go up significantly. If they kept their savings rate consistent in their company retirement plans, the value of their retirement went up even more since they were buying into the market with every paycheck on the way down and on the way back up of the dip.

But the moral of the story is consistency wins. Anyone trying to time the market by going into cash or reducing their savings contributions ran the risk of the market leaving them behind.

Why try to "play" the market and time the moments when it goes down and the moments when it goes up?

Instead, try a different game if you think the market is going down. Think of it like the Black Friday sale. But instead of waiting in line in the cold and then wrestling the new TV out of your neighbor's hands, get positioned to buy stocks on sale! This is the moment to increase your retirement savings rate if you can trim your spending to allow it. Then, if the market drops, sure, your current balance takes a breather which is no fun. But in the meantime you get to "do" something via buying more of the same stock that costs less money.

But we can never know when the market is going down for certain. The risk of buying into a market that goes up when you expected it to go down is that, well, your money goes up.

So grab your keys, do your once-a-month tank refill of that Prius and head to HR to bump up your savings. That is the only action to take when you feel uncertain about the stock market.

Disclaimer: This is general advice on an investment and not a recommendation to buy a particular investment. Remember that all investments carry inherent risk.