This has been a traumatic few weeks in the stock market. Global markets have seen their biggest falls AND then their fastest daily gains since 2008.
I am starting to get whiplash watching them drop like there is no bottom only to shoot up again.
Distressingly the down movements are far outweighing the ups with the markets ending the first quarter of 2020 firmly engulfed in the red.
While this trauma is beyond paltry in the shadow of the natural disaster that has caused it, in this article, without diminishing the horror of that situation, I want to focus on an area `I am familiar with, Investing, and the thoughts I have around how to decide if it is time to take a step back from doing so for the moment.
When should you temporarily stop investing?
There are 2 golden rules to investing.
Firstly only invest money you have available to invest.
Secondly invest money you are not going to need in the next 5 or more years.
The first rule requires that before you invest you have created a safety net of available money to fall back on in an emergency. If you don’t have income or sufficient income coming in, this is one of those emergency situations. You have eliminated all high interest rate debt you may have incurred and you are comfortably covering your necessities.
If the boxes above are not ticked now is the time to focus on those and possibly take a break from investing.
The second rule is that money you have invested is invested for the long term. So while you may be taking a break, your investments don’t need to. Leave them invested and don’t sell.
Why you shouldn’t stop investing
Assuming you have an emergency fund of 3 to 6 months of expenses and have established a workable budget with an allocation to investing, these are the 3 reasons you should keep on investing.
Down markets are excellent opportunities to invest
Would you overlook a sale at your favourite store?
I know I wouldn’t!
Market drops are exactly that, a great big sale! And the longer you have until your investing goal the better it is for you!
If you don’t have a long runway to your goal, take this as an opportunity to stock up on safer investments or build your cash reserves.
The best days in the market typically follow the worst
It is impossible to accurately time the market. By investing consistently you take yourself out of that guessing game and position yourself to always be in the market, including over the low periods. This means you are perfectly placed to get the full benefit of the subsequent rallies which lead to the biggest gains.
I totally acknowledge this is nail biting stuff, but keep reminding yourself that in 2008 and 2009 the market dropped by 50% only to be followed by 10 years of phenomenal gains. If you had invested $1,000 on 1 January 2009 it would have grown to £4.510 by 31 December 2019. A 351% gain!
You are a long term investor, temporary drops are irrelevant
If you are in the market for the long term, which all true investors are, stay in the market.
Growing wealth requires time, commitment and focus.
Keep doing what you planned on doing, keep investing consistently and ignore the blips along the way, or at least don’t sell because of them.