Before I start, I want to remind you that I am in no way, shape, or form a certified financial planner, money manager, stock broker, or anything similar. However, I want you to hear this side of the story based on what is happening in the U.S. currently.
I wanted to stop in and gently remind you NOT to sell your stocks, mutual fund shares, etc. even if the market drops another 10%, or even 50%.
During the 2008 recession, I watched people close to me cash in their entire retirement account because it had already lost a lot of money in the market – and they didn’t want to lose anymore.
At the time, I didn’t know any better to tell them otherwise. Now, I kick myself every day for not having the sense to even do a quick Google search and find out what the right move was.
I’m attempting to “right” that wrong, by sharing the story with you in hopes that I can help at least one person change their course of action and do some more research before cashing out their retirement fund early.
Once you drain your retirement account before a certain age, you lose at least a third of the value to taxes, fees, and government nonsense; and you can’t exactly just put the money back in there. Combine that with the money you’ve already lost, and all of those opportunities for growth once the market rebounded are gone – you’d be in a tough spot.
Game over. It’s time to start fresh.
But If the Market Crashes, I’ll Lose a Ton of Money…Right?!
In the short term, yes, you technically will. Yet in the long-term, you will probably gain some.
While we typically think of assets as simply a dollar value, it may be beneficial to view them as an “item.”
I’m going to get a little detailed her just so you understand what in the world I’m talking about.
Let’s say one share of XYZ stock might be worth $100 now, but in two weeks it could be worth $50. As I mentioned before, it might seem like you just lost half of your money. But there is one thing you need to remember:
You still own that one share.
If the market improves and that stock jumps even higher to $125, your “asset” is now worth more than it was previously.
Yes, you temporarily lost money, but in this example, it skyrocketed back up. Keep in mind that it could also go lower.
Thinking of these shares as “items,” as opposed to blindly looking at the current cash value might help you make a different decision. This might deter you from getting nervous when the dollar value drops and you’re tempted to sell it so you “don’t lose more money.”
Let me put this another way: Let’s say you bought a share of Facebook for $100. Two months later, Mark Zuckerberg broke his hands and couldn’t effectively run the company (please mind my super random, far-fetched example), and the share price dropped to $50. You get scared, and because you already lost so much, you don’t want to lose even more— so you sell the share. You just lost $50.
If the market rebounds, you won’t see that money—it was a complete loss on your end. If you had held out until the market rebounded, you’d have seen that money again and your share would be worth more than it was previously.
That $50 may seem like a small amount, but most people don’t own just one share. Multiply that by 100 or 1,000 and you’re talking a lot more money at stake. More risk, but the ability for more reward as well.
I like to continually put money into the market at a regular pace. If I ever changed my position on this, it would be to put MORE money into it when the market takes a downturn.
If that $100 share is now selling for $50, I can buy it for much cheaper price than it was valued at previously. If it then jumps back to $125, I can more than double my money. Of course, the share could tank too.
Keep in mind that the markets don’t move that quickly, and a downturn could last quite a while.
Since I buy mutual funds and they are made up of hundreds of stocks from different companies- if one company goes under, it won’t affect the value of the mutual fund that much.
If the market tanks and the entire stock market ends up valued at $0, I’m pretty sure our entire society would crumble.
Money won’t matter anymore anyways if that does happen, so I like to think of this as a lower risk strategy.
My Current Situation
My 401k had $33,758 in it last week. Now it’s $4,000 lower than that. Am I freaked out?
I’m in this for the long run—there will probably be four or five much larger downturns in the market before I retire and need to take money from this fund. In the grand scheme of things, I believe it’s better to leave your money where it is and stop watching the news. The future of your retirement fund looks bright, as long as you have a few years before you retire. 🙂