For most things in life, good things come to those who wait. Patience really is a virtue. It is very hard for us to be patient. We live in an instant gratification society. If we don’t like something, we dump it for something better. Loyalty is often unheard of. Heck, if my phone takes more than 2 seconds to load an app or a web page, I’m pretty bothered.
Finally graduating dental school took a lot of patience. Four years of undergrad, and four years of dental school was a long haul. However, it really did take 8 years to become somewhat competent, and we still learn throughout our career. We wouldn’t want it to have taken less time. Those who stayed the course throughout the 8 years made it, however there were many that didn’t stay the course. There were several pre-dental and pre-medical students that weren’t pre-dental or pre-med after a semester or 2 of science classes. Dropping out of the pre-dental or pre-med course may have not been disastrous for those tho dropped out. Perhaps they found another great career and are successful and happy. You definitely don’t need to be a dentist or a physician to be successful.
However, dropping out of the stock market when the times are tough almost certainly will end in Catastrophe. I have heard horror stories of those who lost a lot of money in the stock market and it ruined their retirement or financial independence. But it doesn’t have to be that way. Disaster comes when you don’t stay the course and you sell low and/or buy high. Getting out of a free falling market can be a catastrophe. And even worse is then getting back into a hot market. Now if someone guesses to get out before the free fall, and gets back in before the hot market then sure that is the best case scenario. But no matter what anyone tells you, know one knows this. There may have been a lucky few who have done this. They may claim it wasn’t luck and you should follow them. But don’t. It was just luck.
There are some gurus who recommend market timing. And to an extent it can be ok, but not for the normal investor. The vast majority of us must stay the course. Maybe you will lose 50% of your money. But if you stay the course, and even add more money to your mutual funds (buying low) then in the end you will be fine. The market has always gone up in the long term. I guess there is a possibility that it continues to go down and then to 0 and you then lose all of your money. But A) that has never happened before, and B) if that does happen then you have a lot more to worry about than just your money. Probably Zombies or something. If you are worried about losing all of your money in broadly diversified Index mutual Funds, then you probably worry about the Zombie Apocalypse. If it happens, nothing you can do about it and you’re screwed anyway.
The people that have lost a lot of money in the stock market, in 2008 for example, are those who panicked when they lost a bunch of money, withdrew their money from the market and were out of the market when the market returned to all time highs. Not only should you stay in the market when it is down, even down a lot (a bear market), you should actually pray for bear markets so you can get a good sale on stocks. We all love sales for cars or clothes, but for some reason with stocks we’d rather buy a hot (overpriced) stock.
It goes against our innate human emotions. If the stock market is going down and the world looks like it’s a mess, we want to withdraw our money and put it under our mattress and guard it with our guns. And when the economy looks like it is the best thing ever and everything is wonderful, that is when we want to poor our money into it. This is wrong however. you have to do the opposite of what you innately think is best.
In order to prevent yourself from making a serious mistakes and withdrawing your money from the market in a bear market, you have to know your risk tolerance. How much can you lose without panicking and withdrawing? Usually when stocks go down, bonds go up. That is why most people should have some sort of bond allocation in their portfolio. So if you have 60% stock and 40% bonds, and the market loses 50% of its value, you don’t lose 50% of your money, you lose 30%. That will likely be easier to swallow and easier to stay the course. As long as you stay in the market, your stocks will eventually regain what they lost and more. That is not guaranteed. But it has always happened before. Through numerous wars and world wars and an array of other catastrophe’s, it has always come back up.
So in the next market down turn, this is what you SHOULD do (although you may want to do the opposite). Say you have an asset allocation of 80% Stocks and 20% Bonds. Say that the market loses a lot of value and now your asset allocation is 60% stocks and 40% Bonds. You should then buy stocks to make your stock allocation at 80% again if this is the allocation you are comfortable with. You will likely not want to buy more stocks because they just lost a lot of value. You may want to actually sell your stocks and buy more bonds and you saw those actually gained value. But that is a recipe for disaster. That is selling low and buying high. Buying low is buying stocks when they are losing value.
Another way to lose money in the stock market besides panicking and leaving the market is buying single stocks. While it is very unlikely that owning a mutual fund of every stock in the world will lose all of it’s value and very likely it will eventually rebound from bear markets, this is not true of individual stocks. They lose all of their value all of the time. There is no way you can choose stocks that are always winners. Just choose mutual funds and diversify away a lot of risk.
In conclusion, choose an asset allocation that jibes with your risk tolerance. Understand that the more allocation you have to stocks, the more money you will likely make in the long term. You will also be more likely to lose more money along the way, and if that will make you panic and sell low then be careful to not have more stocks than you can handle. But once you choose that allocation, stick to it. Rebalance every year back to that allocation which will ensure that you are buying low and selling high. If you do this, and stay the course you will likely see the magic of compound interest and stock market growth over a long period and be richly rewarded.
-The Debt Free Dentist
*Nothing on my website is professional or legal advice. I am only sharing information that I have learned and it may or may not be accurate. I am not liable for any problems you may have by following this advice. Please do further research and get professional and/or legal advice about any of these topics.