The Stock Market is designed to transfer money from the Active to the Patient. –Warren Buffett
There is a lot of anxiety in the FIRE community about the stock market dropping. It has dropped faster than it has in generations and as more information becomes available about the effects of the virus and the measures against it, it seems a good bet that things will only get worse for some time yet. It’s become the kind of thing that feeds off itself. The economic pain brings more businesses down, which creates more pain and fear, continuing the cycle – and the lockdown of supply lines and societies may mean social unrest and governmental collapse in some parts of the world. Is that guaranteed? Of course not. But from where we are standing right now it looks plausible.
So people are worried about their strategy for the future. FIRE teaches us that we should be passive index investors, at least when we are at the stage of growing our wealth. We are supposed to stay the course. But what about now? The drop is huge and emotional, and people are afraid. That is not surprising. But I can’t recommend changing your strategy in the middle of a crisis. That’s not likely to lead to good decisions. Instead I recommend two things.
Consider a bigger emergency fund than you usually carry.
Beef up your emergency fund. If you don’t have a large emergency fund now might be the time to put money into that while you can. I would recommend in this climate that you want at least 6 months of cash on hand, as it might be very difficult to find another source of income quickly if yours dries up. If you are still earning money, shoring this up might be the best place to put whats coming in until you hit that number. Do this from your income and not by taking money out of your investments to put into cash is likely a very bad idea with the stock market down so low, as pulling out the dollars you need will be a lot of shares that won’t grow again later.
Don’t change things in a panic if you don’t have to
Then, stay the course on whatever your investing strategy was. If you have a solid emergency fund, and you have a job, keep your money in the stocks and keep putting more in too. This is not the time to pull out and lose everything. I know it looks scary, but these things do happen. The advice about index investing and the 4% rule takes into account situations like this. If we account for the most pessimistic scenarios of what comes next, the analogy would be the Great Depression and WWII – years of economic collapse followed by tens or hundreds of millions of deaths. That decline and those deaths were an even bigger percentage of the world’s wealth and population at that time. But if you stayed the course in stocks through that, you would have still come out ahead in the end.
A different way to look at it
I know that’s easier said than done, especially since the number you see is your dollar value continually declining. So I recommend trying to think about the stocks themselves rather than the value of your investments. The stocks are what you actually own. The number of shares you own doesn’t change with the market, and it keeps going up as you buy more.
I compare it to a house. Imagine you have lived in the same house for the last 30 years – what was your home value in 2008 at the bottom of the crash? Why would you even care, especially now that it is twelve years behind you? If you weren’t planning to sell it that year it didn’t matter. The property value is just an imaginary estimate of what you’d get if you sold today, but what you actually own is the house. The dollar value only matters when you sell and when you try to get a new house.
The stock market is the same way. Although we talk about it like it’s money, that is just because it is so liquid that the estimate of what you’d get if you sold ‘right now’ is very accurate. But the truth is no one has ever ‘had money in the stock market’ in the sense of having cash in a bank account. What you own is a number of stocks or shares in the fund. The dollar value you see is still just the estimate of what you’d get if you sold right now.
Which means that if you aren’t planning on selling all your stocks today or anytime soon, you shouldn’t care about the number. If you think about it like that, you don’t need to ‘be strong’ or ‘weather the storm’ because you shouldn’t feel any emotion or worry at all. You still own the same number of shares today that you did yesterday, and unless you absolutely need to retire this year, you only care what the value will be many years or decades in the future.
If you’re having trouble with this get into the habit of looking at the actual number of shares owned when you look at your investments. And get used to how that doesn’t change the same way as the stock valuation.
This is why people talk about market crashes as ‘stocks going on sale.’ You can buy more shares for the same price relative to when it’s higher. It’s the same thing as people who had money being able to buy houses for dirt cheap when everyone else foreclosed in 2008. If you have extra cash, the worse the market is doing the more money you should want to put in. You don’t really lose anything if it still keeps going down for a while after you put money in. It will come back eventually. And just because there might be a better sale next week doesn’t mean a 30% sale this week isn’t good. After all, you can’t time the market.
I hope this helps.