I recently read a Bloomberg article called “Mom and Pop Sit Out Rally, With Stock Exposure at Six-Year Low.”  The point of the article was that many retail investors were anxious about the market drop in December and reduced their market exposure.   But it didn’t stop there.  Many even cut their market exposure further in January.  This selling went on as the S&P 500 Index gained almost 8 percent in January.  This would be the best month for this S&P benchmark since 2015.  January hadn’t seen this big an increase since 1987 when it grew 13 percent.

Most Likely Scenario

So why did many sell out of their market positions?  A few reasons come to mind:

  • They simply can’t stomach the market volatility any longer.
  • They think there is a better place to put their money for the time being.
  • Their income strategy is to sell their positions to create the money they need to live on, and don’t want to see their account values drop any more, further impacting their income stability.
  • They have a “feeling” based on some type of research or “financial professional” comments that the market is going to continue to drop.

Even if we didn’t sell out of the market in December and enjoyed the January bounce, I think we all have experienced these types of feelings of confusion and anxiety at some point.  But what do these folks do now?

What Now?

Yeah!  What do the people that sold out of the market do now?  The ultimate question for them would have to be, “are you ever going to invest again in the market?”  If no, then how will you create the income you need?  Will that alternative investment create enough?  If yes you are getting back into the market at some point, then when are you going to get back in?  Of course, your response is to tell me you will get back in when the market hits bottom.  Great plan!  So, now tell me when it’s going to bottom.  Go ahead.  Please pick a number and share it with me.

The truth is that no one knows when the market will bottom, and no one knows if the market might not jump 10% tomorrow.  This is where confusion and anxiety thrive.  When you are counting on market growth to live a nice life, and can’t make it if the market drops, then I fully understand your concerns.  I remember a gentleman that came into our office in 2014.  He was a very smart man.  An engineer.  He built his own home.  But his investment plan centered around being in the market at the right time, and out of the market at the right time. Timing!  Emotions!  He got out of the market after the 2008 drop.  Remember.  This was 2014.   And he hadn’t moved back into the market because of his uncertainty and anxiety.  So, how much growth did he miss out on?  I still wonder if he has gotten back into the market to this day, and this can be a real danger to him and his future.

Many people fear market highs.  The thinking is that the market has never been higher, so chances are good that the market is ready for a pull-back.  And these people will struggle to ever get back in the market.

Think about this gentleman that visited our office and look at the S&P 500 values below:

January 1, 2009                 865.58

January 1, 2014               1822.36

January 1, 2019               2584.96

From January 1, 2009 to January 1, 2014, the S&P 500 grew 110%.  That is the approximate amount of growth I know our friend missed out on.  And if he didn’t get back into the market until January 1, 2019, he missed out on an additional 42%.  That can be a bitter pill to swallow, but market volatility can drive you crazy if it directly has a significant impact on your life.

So What Now?

In order to bring some sanity to life and to diminish the stress of market volatility, let’s try something different.    Let’s make a few statements of what we know:

  • Historically, the market has grown and over time outperformed many other investment options
  • Inside the market are some investments that pay you and some that don’t
  • Outside the market are some investments that pay you and some that don’t

If you have an investment that is paying you, you think twice about selling it.  As long as you are being paid, why would you sell your income producer unless there is another investment that is as safe and pays you more?  With this line of thinking, if your investments in the market are paying you and are not impacted by market volatility, and the income they pay is enough to support your lifestyle, don’t you think your stress from market volatility will be reduced?  Sure, you don’t want to see your account value go down, but remember, over time, the market historically has performed pretty well.

Bottom Line

So, the bottom line is to buy investments that pay you regardless of market volatility.  These may or may not be in the market.  And buy investments in the market that pay you regardless of market volatility.  Then don’t sell when the market drops, because the market, most likely, is going to come back up, and you don’t want to be worrying over my earlier question of when exactly the market is going to bottom.

One of the comments from one of the readers of the article stated that the US stock market is up 250% since 2009.  It’s overvalued and now is not the time to invest more into it.  I wonder if that was also his or her opinion when the market was up 100% since 2009, or 200% since 2009.  On January 1, 1978, my senior year in high school, the S&P500 was 90.25.  As of January 1, 2019, that’s an increase of 2764%.  I wonder if I should have gotten out of the market at S&P 225???