As the federal reserve pushes up interest rates to get inflation under control, volatility in the stock market continues this year. Take a look at this chart to see the ups and downs we’ve seen so far this year.

Source: *Navigating the Pain of Your First Bear Market,* A Wealth of Common Sense
https://awealthofcommonsense.com/2022/09/navigating-the-pain-of-your-first-bear-market/

Times like these test even the most committed investors, but they’re not unusual. In fact, drops of 10%, or even over 20% are fairly common in the stock market’s history. Sometimes these drops are short-lived, and other times they can last years. Here’s a table showing all of the bear markets we’ve had since World War II (a bear market is when the stock market drops by at least 20%).

Note on the table the number of days each bear market lasted. Some, like in 2020 with the pandemic, only lasted a month. Others, like in 2000, lasted years.

How can anyone decide to invest amidst all this madness? Here are some things I do even when the market seems like it’s going haywire.

Keep Investing

The strongest temptation in choppy markets is to sell everything and wait out the pain. There is plenty of past research that shows this usually doesn’t work out well for investors. Many typically miss out on the market’s recovery.

If you’re a young investor, lower values are usually your friend. Continue to invest, preferably by using dollar cost averaging, which simply means contributing on a regular basis from your paycheck (twice a month or monthly).

I’m 42 years old and personally have a retirement account where I contribute the exact same amount of money on the exact same day of each month, regardless of what the market is doing. I’m confident that buying in at today’s lower prices will pay off in the decades to come.

Pre-retirees or retired investors may feel further justified in selling, since they are often living on a fixed income. I believe this is still a mistake for a couple of reasons. First, you may again miss out when the market recovers, and second, you’ll be missing out on continued interest from bond investments and dividends from stock investments.

For most investors, including my own clients, those small interest and dividend payments each month are like “mama dollar” and “papa dollar.” They’re reinvested into the market at lower prices, allowing them to compound further, creating new “baby” dollars (Sorry. I’ll quit that analogy now.)

Turn off the News

Have you ever known someone that seems to thrive on negativity? It can really wear on you, and even drag you down a bit. That’s the financial news media, but compounded to the power of 1,000. Financial news makes money on fear, driving more eyeballs to their mobile apps, tv channels, and websites.

Think about the most memorable headlines from the last 10 years. The ones that first come to my mind are COVID, the 2020 election and storming of the U.S. capitol building, the war in Ukraine, and Inflation. What’s wrong with this picture? Was there any good news at all? Of course there was, but the media knows our eyes are more glued to our phones and computer screens when there’s rotten stuff happening, so they push those stories front and center.

Investing can sometimes be scary even for financial professionals. I’ve lived through several bear markets and market corrections now, but each one is a little different. Most times I simply ignore what an opinion writer says about the latest increase in fed rates and the doom he foresees. Instead I focus on my long-term financial plan, and encourage my clients to do the same.

Remember the Facts

In addition to ignoring financial news garbage, I focus on the facts of how the market has performed over time. What keeps me going is to ignore what the market does over the weeks, months, and even years, and to focus on what it does over decades.

For example, if you invested $100,000 in 1990, by 2019 (30 years later) those funds would have grown to $1.23 million in a moderate portfolio of 60% stocks and 40% bonds.

But just in the last 13 years since 2009 the stock market has experienced drops of 16%, 19.4%, 13.3%, 10.2%, 19.8%, 33.9% and this year about 20%. However, since 2009 the stock market overall is up around 700%!

To earn the gains that will truly build your wealth, we need to accept the short-term market drops and keep a view on the long term.

Find Silver Linings

As World War II was concluding, Sir Winston Churchill was credited with saying "Never let a good crisis go to waste." Borrowing the phrase in 2009, Rahm Emanuel, who was Barak Obama's chief of staff during the financial crisis, said “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.”

Regardless of how you feel about Churchill's or Emanuel's political decisions during moments of crisis, the phrase is a relevant one when it comes to personal financial decisions during what may feel like a financial crisis. Here are a few ways to not let this moment go to waste:

Bonds are Back

Very low interest rates drove a lot of our economic growth over the last decade. This was great for borrowers, but terrible for savers. Now the tables are turning. As interest rates go up, borrowing costs are getting more expensive, but “lending money” (by purchasing new bonds) is getting very attractive.

A one-year U.S. Treasury bond right now is paying over 4% per year, up from just 0.08% a year ago. My online savings account at Ally Bank pays over 2%. So does cash savings with my investment partner Betterment. US Treasury issued I bonds (the I stands for inflation) are currently paying a whopping 9.62%!

With interest rates rising, the current economic opportunities are shifting toward being a lender, rather than a borrower.

Stocks are on Sale

With values lower compared to 2021 prices, stocks are now on sale. So why aren’t more people buying?

If you’re in the market for a new car and the dealer says everything is 20% off this month, you’re jumping at the chance. If you have confidence that the world’s long-term economic future is bright (and I do) then these market corrections should be viewed as opportunities, not moments of panic.

Keep Inflation in Perspective

Hearing reports of soaring inflation can put a lot of people on edge, even if you don’t take the market’s recent performance into account.

But instead of worrying about how the national measure of inflation looks, consider your own inflation rate. For example, when the government announced that inflation increased 8.3% in August compared to last year, the inflation of home values is a significant part of that number. It means that it’s become a lot more expensive to purchase or rent a home compared to last year.

However, if you already own a home, you either locked yourself into a pretty low interest rate, or even better, your home may be completely paid off. As a result, the national inflation rate may be 8.3% but your personal inflation rate is probably much lower. The same goes for fuel costs. Fuel costs have been soaring this year, but if you have a short commute to and from work, you aren’t feeling that sting nearly as much.

I hope this article has offered some good perspective on how to press ahead in scary markets. Remember to ignore the viewer-hungry financial news media, focus on the historical facts of market performance, find the silver lining opportunities as interest rates climb and stock prices decline, and most important of all…keep investing.

Important Note: If after reading this you still have concerns about the market, I invite you, whether you’re a client or not, to reach out to me. I’m here to help and guide anyone I can toward wise long-term financial decisions.