Investor Panic Prevention Plan 2022
Despite your fervent wish to avoid down markets at all costs, I have bad news: being a long-term investor means that you need to do just that.
It’s been a tumultuous ride in 2022, and most of the action has been to the downside. It’s worth repeating that the central fear is that the Fed’s rate hike campaign, along with still-high inflation, the war in Ukraine and COVID shutdowns in China make a recession less of a risk and more of an inevitability for the US economy.
These concerns have caused many investors to sell risky assets, like growth and technology stocks, crypto, and junk bonds. For the broad S&P 500 index, we are on the cusp of a bear market, defined as a more than 20 percent drop from the previous peak, which occurred on January 3rd (4796.56). If the index closes below 3,837.25, it will mark a 20 percent drop and we would be in a bear market for the second time in three years (the last bear was short, but steep—a 33.9 percent plunge from the peak on February 19, 2020, to March 23, 2020).
Investors quickly were able to soothe themselves after the pain. From the bear market low in 2020, stocks came roaring back by the end of 2020 and soared again in 2021. In fact, from 2019-2021, the S&P 500 saw its best 3-year performance (+29%, +16%, +27%, respectively) since the tech book of 1997-1999.
I have an idea what you might be thinking: “Thanks for the info, Jill, but what should I do to protect my precious investments?”
Glad you asked, because I went back to a column from the Feb-March 2020 sell off to see if my advice holds up, two years later. The plan will not shield you against market downturns, but it should protect you against yourself, and more specifically, protect you against your desire to do something when you see lots of down arrows.
Remind yourself why you are investing. Most of us are saving for a long-term goal, like retirement or college, which is likely years or decades in the future. Even if you were retiring within the next couple of years, your account needs to last another 20-30 years. For those who are still investing, you’re purchasing shares at a hefty discount to the levels seen at the beginning of the year.
Determine whether you need cash. Do you need to make a house down payment, purchase a car or pay a tuition bill within the next 12 months? If so, that money should never have been at risk at all, so admit that you blew it and get whatever you need out of the stock or even the bond market and keep it in a safe savings, checking or money market.
Check your risk tolerance. Sure, you felt bold when stock market indexes were making new highs. Now that those decisions are blowing up in your face, how do you feel?
Maybe you really can’t stomach as much risk as you thought you could. If that’s the case, you may need to readjust your allocation. Here’s your warning: If you do make changes, do NOT jump back into those riskier holdings after markets stabilize. You need to make a pinky swear with yourself that you will stick to your revised plan, FOR REAL!
Find free money. If you want to help yourself feel better about market losses, figure out how much you are paying in investment fees and determine if you can scoop up some free money.
Can you replace an actively managed fund with a no-commission index mutual fund? How much are you paying a so-called advisor, who isn’t doing much to improve your bottom line? Could you replace him or her with an automatic investment platform at a fraction of the cost? Find that free money!