Oh, Sh*t, the Market’s Down! What Do I Do?
I have a webinar with this title because down days in the market make me laugh. (Seriously!) On 8/5/24, the stock market had its worst day in two years, part of a three-day losing streak. On 8/6/24, the market closed substantially higher, showing a broad rally.
For 24 hours, market watchers wailed and beat their breasts, published articles about recession, and caused retail investors to sell $1 billion. Big mistake. In contrast, the institutional folks bought $14 trillion on the dip, and that was one of the reasons for the rally.
So, what can you do when the market goes south?
The first thing is to stop looking. Ever hear the expression, “If you go looking for trouble you will find it?” Yeah, well take that to heart with the stock market. Turn off the pundits who are paid to keep your eyeballs on the screen. The people who lose when the market goes down are the people who sell their holdings. Don’t be one of them. The “algos” and institutions are already way ahead of you. There is nothing you can do. Go take a walk. Get some exercise.
Here’s what we can count on: The market’s best days frequently follow its worst days. What that means is that, if you’ve sold, you don’t get to experience the next rally. If you sit tight, the rally is coming, and you will be part of it. Historically, the market rise (bull market) has always been higher (over time) than the market drop (bear market). Always.
There are times when the market drops over a sustained period. These bear markets can last from several months to a couple of years. Rarely do they last beyond that. You can expect a bear market about twice a decade. That means if you are 50, you can expect at least 8 to 10 more of these market cycles to play out in your lifetime.
Wouldn’t it be better to prepare for the inevitable rather than make yourself stressed?
Here’s what you can do in a down market:
You can invest dry powder. Dry powder is cash you keep on the side specifically to buy during market dips or when the market is on sale. When the market is 10% or more down, it’s a great time to buy. Do not try to time the market bottom. You will miss your opportunity.
You can tax-loss harvest. This gets a little complicated because you must trade a depressed fund/ETF for a substantially similar fund/ETF and lock in the paper loss. This is something you do in taxable accounts. There is no point (because there is no tax benefit) to doing it in a retirement account.
You can rebalance your retirement accounts. Diversification of your retirement account looks like a pie. It is always 100%. When the market goes down, some asset classes also go down, and that forces other asset classes up. For example, in 2022, the U.S. Large Cap asset class dropped significantly as Commodities (oil, gold, etc.) rose. This made it the right time to sell the profit in Commodities and buy the dip in U.S. Large Caps. In other words, “buy low, sell high,” except in reverse: Sell high, then buy low.
You can convert depressed IRA assets to Roth. When the market is down, you can convert more pre-tax retirement dollars to after-tax retirement dollars. Then, when the market returns, you will have some free money on which you NEVER owe tax. This is a favorite down-market tactic of mine.
You can sell “puts” or purchase a put-selling ETF/fund. A “put” is an option; a right to sell. This is an advanced and risky strategy, especially if you don’t own the underlying stock on which you’re selling the put option. If you have no idea what I’m talking about, this is not for you. I’m just trying to be complete. Stick to the other ideas above.
If you want more of this, join us in the Madrina Molly™ Community, where your subscription will enable you to ask questions and take the full webinar. (Join our Community waiting list here.) When you understand more, you will be less stressed by the stock market and more certain of your financial future. We want that for you.
And one more thing: The market doesn’t care whether the administration is Republican or Democrat. Nope. Doesn’t matter. Go take a walk. Get some exercise. #WeRescueOurselves
Copyright © Madrina Molly, LLC 2024. All rights reserved.
The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice
Sherry Finkel Murphy, CFP®, RICP®, ChFC®, is the Founder and CEO of Madrina Molly, LLC.
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Before I even get going here, I want you to know that if you are invested in an S&P 500 Tracking Index, ETF, or Mutual Fund anywhere in your portfolio, you are already participating in crypto. You are participating because there are companies represented within this index that hold and invest in crypto themselves. They may have direct treasury investments in digital assets, partner with crypto firms, or participate in the underlying blockchain technology.