More reasons to stay in the market
Written by Gary Silverman, CFP®
Last time, I started a discussion about why I stay in the market even when the indicators are pointing to a recession. I’ll continue that today.
Why exactly are we scared of a recession, anyway? Before you think I’m an idiot for asking that, I’ll freely admit that the Great Depression (from my mom’s youth) and the Great Recession (fresh in all of our memories) were definitely not kind to the stock market. So we equate recessions to stock bear markets. But that’s not really the case. The stock market actually went up during four of the nine recessions since 1957. Three of those four not only went up, but included double-digit gains.
Indeed recessions aren’t good for stocks—on average—losing about 1.5%. But as you can see, it’s not clear that they are the disasters we equate them to be.
So, another reason I don’t get out for a recession is that there’s a decent chance that not only might the stock market not plummet…it might soar.
But the reasons I’ve mentioned last week and today aren’t my main concern. The really big deal isn’t getting out, it’s getting back in. You see, while the year of the recession may or may not be a bad one, the year after 8 of the last nine has been up an average of over 15%. And recessions…especially ones where the market goes south…are disconcerting. When investors are disturbed, they are not so quick to put money into the market. That’s where you’ll hear, “I’m waiting until things settle down.” By the time they do, more often than not the market has already made its move. Up.
So my main reason for not getting out ahead of a recession isn’t that there’s more to worry about than recessions; it isn’t that most predicted recessions don’t happen; it’s not even because many times a recession is actually good for the stock market. My main reason is that even if I do everything right on my way out, I might do everything wrong when I want to get back in.
“That sounds reasonable,” you might be saying to yourself, “but I’ve got rent to pay, my kid’s in college, and I’ll be replacing our car next year…I don’t have time for things to work out…I’ve got expenses now.”
Good point, so let’s cover how current needs fit into my recession non-anxiety.
When I talk about how I handle recession fears, I was thinking about portfolios that would be counted on to grow across time so as to be able to spit out money in the future. When it comes to money you need now (I define “now” as within the next three years…five years if you’re a bit more squeamish), I don’t ever want that to be in “the market.” That money should be only held in more conservative investments. And for the expenses you have in the next year or so, “more conservative” equals a bank account.
This article was published in the Wichita Falls Times Record News on February 14, 2016.