Is the Current Market Drop Bad, Good or Irrelevant?

by Mr. Cheap

There’s a lot of fear about the stock market right now.  As Mike wrote recently, we’re in a bear market.  You read about people who are upset, people who are excited, and people who don’t seem to care.

What is the right reaction?

I think all three are the right reaction.  Which one is right for you depends on who you are and where you are in life.

The sky is falling, panic!

I think this might be a reasonable reaction for someone who just retired, or was expecting to retire soon.  If your finances are RIGHT at the border of maintaining an acceptable lifestyle, this downturn has hit at the worst possible time for you.

Since you’re still fairly young, it might be reasonable to consider coming out of retirement or delaying retirement (yeah, I know it sucks – desperate times and all that).  If you can leave your portfolio alone (and maybe keep adding to it) for a couple of years, you’ll probably be in a much better place to start / continue your retirement with a bit more of a cushion.

Its too late to sell (the market has already dropped), but if the drop has made it that you can’t live off of a 4% withdrawal from your savings, it’d be better to reassess your situation sooner than later.

Start Spending Like a Drunken Sailor

The Warren Buffett approach views now as a great time to build or add to a portfolio at discounted prices.  If you aren’t currently investing in stocks, now might be a great time to consider setting up something like the couch potato portfolio, or the Vanguard Global Stock Index Fund.  My brother has been making weekly contributions to the TD International Index (diversified international index fund with a reasonably low MER – 0.5%).  Its down 41% YTD, but I think he’s going to come through this smelling like roses.  Some people (like Buffett) have been stockpiling cash, looking to try to find (and buy) the bottom, but I think regular, consistent buying through this will look like a pretty savvy strategy in hindsight.  Some might argue that increasing your contributions right now amounts to market timing, but I think this would be a reasonably good idea (if you have any extra cash).

This might be the ideal outlook for someone who is putting away money they won’t need for at least a decade (such as retirement funds).

What Market Downturn?

If your not willing to invest in the stock market (or you don’t have any money to add to your position, like some grubby grad students we all know), the whole situation is pretty irrelevant to you (feel free to ignore the headlines and carry on with your life).  They’re talking about recession, but chances are if you have a stable job that you’re good at, it won’t make much of a difference in your life.

This would also probably be the case for someone who is well into retirement.  The downturn sucks (a 40% drop could really hurt), but HOPEFULLY you’ve got the necessities of life covered by fixed-income or annuities.  If it’s your heirs that will be hurt by the downturn, let them deal with it and get back to enjoying Matlock.

Wrong Response for You

I was talking to a friend recently and she was worried about the market, and thinking she should stop her bi-weekly retirement contributions (she’s about 30 years away from retirement).  Panicking (and getting out of the market) would be totally the wrong decision for her.  She has time on her side to see a recovery (and probably multiple more bull and bear markets) until her retirement.

Similarly, if someone was recently retired and decided to try and take advantage of the market downturn, I think they might be behaving a bit foolishly.  Things might still get worse, or might not improve for an extended period, and if you’re not working you definitely want to protect the lifestyle you have.  A friend of my father’s mortgaged his paid off house to buy Nortel stocks during the dot-com boom and had to come out of retirement after the crash.  Not fun.

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{ 11 comments… read them below or add one }

1 Nurseb911

Bad for everyone else….because they are losing their retirement nest egg

Good for me….because I can continue to buy equities at cheaper prices

Irrelevant….because my investing approach hasn’t changed on bit. If anything its improved as I concentrate my focus.

Good article Cheap!

2 Al

For all we know, mid Oct numbers could be the high point for the next 5 years. Maybe it’s too late to sell and maybe it’s not.

3 LD

Thank YOU for the down to earth advice and the good chuckle <|: )

4 Michel Savoie

Great for me, because my investments (which I am not that deep into) are now being purchased at a seemingly low cost, and I have 30 years to retirement! Slow and steady!

If this market hasn’t resolved in 30 years, I think society will have some slightly more serious issues than my investments.

5 Mr. Cheap

Michael: Interesting blogging project RBC is doing. You should have come to Waterloo instead of Western ;-).

I absolutely agree that there will be more serious problems than stock prices if the market hasn’t resolved in 30 years.

As Dean Witter wrote in 1933 (as quoted in “Stocks for the Long Run”): “There are only two premises which are tenable as the future. Either we are going to have chaos or else recovery. The former theory is foolish. If chaos ensues, nothing will maintain value; neither bonds nor stocks nor bank deposits nor gold will remain valuable. Real estate will be a worthless asset because titles will be insecure. No policy can be based upon this impossible contingency. Policy must therefore be predicated upon the theory of recovery. The present is not the first depression; it may be the worst, but just as surely as conditions have righted themselves in the past and have gradually readjusted to normal, so this will again occur. The only uncertainty is when it will occur. … I wish to say emphatically that in a few years present prices will appear as ridiculously low as 1929 values appear fantastically high.

Or as a blogger who shall remain nameless once said: either you invest in stocks for the long run or invest in a dog, a gun and canned food.

6 Al

To follow up my earlier comment, check the first link below for a 10 year TSX chart. The tech wreck nocked the index from over 11000 to close to 6000 (a 45% drop). It took over 2 years to hit bottom and another 3 to recover. The S&P (2nd link) was even worse. Why should we believe this mess is over in less than 6 months and a 30% drop?

http://tinyurl.com/6fru6p

7 Gates VP

Is the Current Market Drop Bad, Good or Irrelevant?

“Expected” or “Part of the Plan”

It was going to happen eventually. Nobody is going to make it from 22 to “retirement” without some massive drop. If your portfolio and plan can’t recover, then you were just hoping to retire anyways.

(yes, I may be a little evil today)

8 Richard

Making extra contributions is market timing and I have done it – we just need to remember that it’s very rarely this obvious and we can’t make 10% in a day every week.

9 Retired Syd

I’m in the camp of recently retired–so it is, shall we say, a bit unsettling.

But since I REALLY don’t want to go back to work, and I have 2 more years of assets in cash (so that I don’t have to disturb these very low mutual fund assets), I’m hoping I’ll start to see things look better 2 years from now.

I am comforted by the fact that I have many friends who stepped out of the work world to raise children for a few years, and then re-entered just fine. (Maybe set back a few years–but since my financial situation was pretty much set for retirement, a decrease in pay shouldn’t really be a problem.)

Hoping for the best!

10 Slinky

I’m in the excited camp. I just graduated in May and started my 401k. Oh darn, the market is down 30% and I lost a couple of hundred dollars. The horror! I’ve got nothing to lose and everything to gain.

I would be slightly nervous about my job security, but my company is still hiring, so I think I’m good for now.

11 Oblivious Investor

I love that you bring up the idea that it can actually be irrelevant. (So much of what we read about really is…)

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