How To Respond To The Market Drop as a Young Investor
THE BIG THING I WANT YOU TO KNOW:
The first step is to reevaluate your financial plan and make sure you’re pointed towards where you want to go. Figure out how much risk you can take.
If you’re a new investor, in your 20s, 30s, 40s, how does the recent market drop affect you? Your portfolio can handle a larger drop, but maybe you can’t. What does that mean?
I’m 20 Years Away from Retirement, How Do I Respond To The Market Drop?
Mathematically, when you’re younger, you can handle a market drop. You have plenty of time before retirement to get your portfolio back up.
In the past, people have even make the most money towards retirement during these drops. You can buy stocks for cheap and later sell them for much more. In theory, when you’re younger, you should be excited about a drop. So why are young investors discouraged?
Because, the crowd impulse - what everyone else is doing - is to get out and run.
I don’t want to downplay how hard it is to run into the market while everyone else is running out. It feels counterintuitive, but just know you’ll make money in the end.
Millennials On Wall Street
This week I read two articles that you, as a young investor, will find helpful.
This first one was a Bloomberg article called “Is Wall Street’s Untested Millennial Majority A Risk?”
If anyone working in wall street is under 30, they have never experienced a drop like this. In fact, 50% of professional traders fall under this category, as do half of the people who are actually investing.
In the article, there was a quote from a 29-year-old on Wall Street who said, “I haven’t worked in a different era, but who says we’re going back to the old era?”
This is a dangerous mentality to have. We would be foolish to assume that things won’t go back to the way they were.
Instead, think about how to respond in the future. What can I do to make sure I’m going to be okay?
The second article was a column by Jason Zwgie, “When Investing In Stocks Make You Feel Like Throwing Up, And You Do It Anyway.”
Jason talks about his experience investing during the 2008 stock market crash. He continued to invest and throw more money into the market while it continued to fall. It felt incredibly wrong but he stuck it through and ended up making great money.
It’s hard to put money into the market when it’s dropping, even if you know, logically, it makes sense.
The key is to pick the risk you know you can stick with. No matter what that risk level is, just stay consistent.
Don’t Waste The Last Two Weeks
It’s possible we’ll walk into next week and the market will stabilize and grow. We don’t know, no one does. Anyone who says they know what the market is going to do next, is lying. But say we end the year as we started, in a strong bull market.
That doesn’t mean you should forget about the last two weeks.
For young investors, this was your first experience with risk. You need to learn from it.
Think of investing like a roller coaster - you know you’re not going to die when you get on Space Mountain. But some people will feel fine, even great, once they get off. Others will get sick. If you know you’re going to sick, then why would you get on the ride?
If you know you can’t survive a market drop, either emotionally or financially, then don’t put yourself in a position to experience that.
Alternatively, if you know you can handle risk and it doesn’t both you, if you didn’t even notice the drop this week, then maybe you’re being too conservative. Consider investing more aggressively.
Stocks Vs. Fixed Investments
If you look on the first page of your financial statement, you’ll see a bar graph that shows your stocks and fixed investment. Think of the ratio of your bar graph like the speedometer in your car.
The higher ratio here, the faster you’ll earn and the quicker you’ll get to your goal. But if you crash, you’ll take even more damage.
Say 50% of your money is in stocks, as opposed to 90%. If there’s a crash, you’ll lose some of that half but not everything. You still have more than 50% of your savings left to lean on.
If you weren’t worried when the market dropped, you can handle a faster portfolio and you’ll be able to make more money. There’s no better time to buy in than now.
If you freaked out last week, then you should reconsider the ratio of your stocks and fixed investments and make a change.
The first step, either way, after the drop we had this week is to reevaluate your financial plan and make sure you’re pointed towards where you want to go. You can set up a free consultation with me and we’ll work together to figure out what your plan is and what you should do next. You’ll figure out how much risk you can take and feel confident that your plan is taking you where you want to be.