To Weather a Stock Market Downturn, Treat It Like a Sell
With recent talk of a potential recession, it can be difficult to know if you should buy, sell, or hold on to your investments – or cover your head with a blanket and hide from the turns of the stock market. Don’t be discouraged and instead think of the following analogy before looking at your investment accounts next time.
Lifehacker commentator “Daddy drinks because you cry” recently gave this tip to think about the stock market plunge:
I like the analogy “with a discount.” When I was an investment seller I used the following example:
You spend $ 10 a week buying 10 playing cards (you really love playing cards) because you think their value will increase. (Current value: 1 playing card = 1 dollar)
The playing card market is shrinking. Down. Playing cards are now $ 50. You have two options – sell your playing cards (with a 50% loss) or treat it like a sale and buy 2 cards for 1.
In any case, you did not plan to sell your playing cards for over 20 years, and since the playing card market has historically moved up LONG TERM, you are likely to find yourself in a position where cards will cost $ 2 each one day. Would you rather sell your cards at a 50% loss or double the number of cards for the same starting price?
Basically, this is a more accessible way of thinking about the classic buy-in-the-downturn (ie, buy cheap) advice during a downturn. While this may not bring you the most comfort in a bear market, you can use this playing card analogy to remember that these prices will eventually rise and you will be glad you have stock when you could. Whether you decide to buy more shares or keep the current distribution, you will have time on your side.
Commenter youngheart80 shared how this long-term thinking helps you assess the health of your retirement savings, even when the market isn’t hot:
I love a falling market because my purchasing power is increasing now as long as I do well and I have years to go to retirement, so when it jumps up again, no matter how old it is, I dumped a lot of cheap stocks that go up to boom.
When the market isn’t looking good, focus on building your emergency fund and paying off debt so you can be more flexible in the event of a prolonged downturn. If you have time before retirement, there is no need to stray too far from the course of your investment portfolio.