The Stock Market Crashed - Now What?
Updated: May 11, 2020
The Coronavirus has done the unbelievable: It has canceled the entire sports world. I didn’t think anything was capable of doing that. It has also totally wrecked the world’s economy. Every stock market in the world has absolutely tanked since the Coronavirus showed up. To get a general idea of how the stock market is doing, you can look at the S&P 500. The S&P 500 is an index that tracks 500 large companies in the United States. Even though it doesn’t include every single stock available, it is widely considered to be a good way to follow the stock market’s general performance. Since the beginning of March, the S&P 500 index declined close to 30%. Since the bottom, it has recovered a bit. As of this writing, it's down about 21%.
Generally, stocks will go up and down to some extent every year. A reasonable expectation is that s
tocks will go up somewhere between 6-10% on average over time, so for stocks to decline this much in one month is absolutely horrendous. Those of you who have been planning for retirement by consistently investing in a 401k or similar account may be feeling a bit queasy lately. During times like this, there’s a part inside every investor that says, “Sell! Sell now before the market plummets even further!” For most investors, however, selling now would be unwise. Making a move like that can have serious ramifications, such as getting hit with a big tax bill or penalty, or delaying your retirement. You also run the risk of selling at the bottom. I encourage you to resist taking any drastic actions. If you’re experiencing financial difficulty and you’re convinced that the best solution is to cash out part of or all of your retirement accounts, I highly recommend you consult a financial advisor first. Instead of selling, I recommend you hold steady and actually keep contributing to your retirement accounts. I’m confident the stock market will recover, and will probably even go to new highs. The S&P 500’s history is what gives me confidence. The S&P started in 1926, but at that time it only tracked 90 stocks. It expanded to 500 in 1957. I analyzed the year-end close of the S&P every year from 1957 to today. Of the 63 years, 44 times it closed higher than the previous year, 17 times it closed lower, and twice it closed at the same price as the previous year. So right there we can see that the stock market goes up, on average, 70% of the time from year to year. Sometimes it can take a little longer to recover from a bad year, however. So I looked at five year intervals. Forty-five times, the S&P finished higher than it had five year earlier. Thirteen times it finished lower, and once it finished at the same price. For five year periods, it finished higher 76% of the time. I did one last analysis, this time looking at eight year intervals. Fifty-one times the S&P finished higher than it had eight year earlier, and five times it finished lower. When looking at eight year intervals, the S&P finished higher 91% of the time. So what do you do with this information? Be patient. If at all possible, don’t touch your retirement account. Just wait. The more years you have until retirement, the easier it will be to take this advice. The stock market has always gone up over time. Always. Sometimes it takes longer than eight years, but it has always recovered from a bad year. Translation: your retirement account will recover. Probably not next month. Maybe not next year, or the next. But it will recover. The stock market always has, and when it does, so will your retirement accounts.