I know, if you don’t look at your accounts you don’t see the “paper” losses. Well, most people have a hard time not checking their accounts, even if it’s just a biproduct of having to buy more investments, or just a quick peek to satisfy their desires. Either way, we understand that what you’re looking at may not be good!
The history of the stock market
To understand the mental gymnastics needed to hold in a terrible stock market, you must first understand the history. Without this, you won’t have any logical reason to hang on. Historically, the stock market as a whole (total market) returns about 10%. Does this mean that you won’t lose money in 2022? No. What it means is that the long-term average return of the stock market is roughly 10%.
For example, VTI, the Vanguard Total Stock Market Index Fund ETF, has returned about -22% this year. But, over the past three years it has returned 11.77%. In the last 5 years, it has returned 11.22%. Having been founded in 2001, the fund still holds nearly an 8% return since that time, even after experiencing the crashes of 2007/2008, 2020, and 2022. Looking at the graph below, you can see the full history of major stock market events.
Now to be fair, 21 years have passed since 2001. So if in December of 2021 you decided to put all of your life savings in VTI, you clearly wouldn’t show this same level of success. In fact, you would only show the 22% loss. If you continue to invest in VTI for the medium to long-term (3 years +) it is highly likely that you will recover.
Going forward in this environment
It’s commonly stated that the best time to buy stocks is when they’re on sale. Even though I’ve written an article asserting this, it’s not the entire picture. To just suggest that someone buy into the market only when stocks are on sale, would come with the unintended consequence of not buying continuously, thus, dollar cost averaging. As we’ve talked about in the past, dollar cost averaging, or ‘DCA’, is the practice of investing a fixed dollar amount regularly regardless of market fluctuations.
This is the mindset here at the Wealthy Idiots. We both have the intention of investing regularly for the next 15+ years. By doing this, we’re purchasing at nearly every price the market offers. Over time, the ups and downs of the market will blend together and become background noise.
Remember your goals
The best thing you can do in situations like this, is to remember why you’re investing in the first place. If it’s for the long term, remember the “why”.
- Send your kids to college in 12 years
- Buy your dream retirement home
- Take overseas trips in retirement
- Purchase a rental property
- Buy your favorite classic car
- Buy a second home
These are just examples, but I’m highly confident that most people have “drivers” that are motivating them to invest. If these things aren’t near-term needs/wants/desires, why do the market returns today matter? Remember, if you’re invested for the long-term, your mindset should be long-term. If your investing outlook is short-term, you shouldn’t put all of your money in the stock market.
Find something else to do
When something is bothering me, I find a way to take my mind off of it. In this case, find something to do that doesn’t require you to check your investment accounts. I don’t think I’ve looked at my 401k balance in 6 months, and have no desire to. My employer sends money to the plan every 2 weeks religiously, and because of that, I’m not worried about the short-term implications. Keep pushing ahead and don’t worry about short-term losses!