Ok, so the market is suffering, you can see that when you log into your account. However, before full-blown FOMO sets in and you start planning to keep that money under your mattress, ask yourself: Should I really be worried? The idea of hiding your money away feels like an act of protection, for sure. By shielding it from the harsh world you’re defending it from the bad guys, right? It’s not really that simple.
What actually happened to your money in 2018?
To answer that question we have to take a look at something called ‘asset classes’.
Asset classes are a way of referring to different types of investments. At the highest level it’s broken up into things like public equities (the stock market), bonds (loans you buy a piece of), commodities (contracts for pigs or corn), currencies (buying Euros with dollars), and real estate (you know this one). There are more specific categories within each of these, like domestic or foreign stocks, and government or corporate bonds. And while there are understood systems, there is no central rule on exactly what an asset class is or how to measure it.
Owners of large assets, like pensions or a university endowment funds, often like to bucket their money in something called ‘asset allocation’. That means they spread it out across several, or all, asset classes. Asset allocation is essentially a way to achieve diversification, and is a very smart move. Diversification in its most simple terms means to spread risk around so that when bad things happen, you aren’t at a total loss.
So, what do asset classes have to do with the money troubles of last year?
In a perfect world, asset classes wouldn’t fluctuate together in a single rhythm like a group of long-distance runners, but instead would move independently, like a team of relay racers.
Consider 2018 the year that the baton didn’t quite cross the finish line.
And that’s what was so weird about 2018. For the first time in a long time, virtually of all the asset classes posted a negative return. Most years when stocks go down, another asset class goes up. But in 2018, unless your cash really was under your mattress (and even then you lost about 2% to inflation), you lost money. Bonds, commodities, all sizes of stocks from most countries, real estate investments, and more were all either negative or broke even. In 2018, we did not see a single asset class post a greater than a 5% gain. The last time this happened was 46 years ago. Nixon was president.
It’s not so much that everything has been sold off and everyone has lost all of their investments, a la the Great Depression. In fact, the overall losses year-to-date are comparatively small, historically speaking. Those great big lows came after some pretty high highs, so the overall loss may have felt more jarring than it really was. In fact, in 2018 there was just a 1% difference in the index’s best day vs its worst.
As Yogi Berra famously said, “it’s tough to make predictions, especially about the future.”
What should I do?
We love to sing the praises of DCA. Dollar-cost averaging is a force in and of itself that averages out the prices you pay for your stocks over time. Your recurring investments occur no matter if the market is rising or falling. Of course, it feels better when the market is on the rise, but that means you’re purchasing shares at higher prices. When stock prices drop sharply, it’s like they’re on sale. Buy low and sell high, remember?
2018 was the first year in a decade that the stock market had a negative return. When you consider that the average age of a first-time investor is 23, you can see where the fear stems: This might be the first time you’ve ever seen your investment account balance drop.
If that’s true and you’re shocked (shocked!) by the market fluctuation, we get it. Take a look at your age, your strategy, and your timeline. When will you need this money? If you’re decades from retirement, then just breathe. Market movements are part of the process and the entire reason that people invest in the first place. It’s where the returns come from, after all.
For the money you’ll need to access sooner, a money market account, CD, or other less risky venture might be just the thing for you. Diversifying yourself this way lets you have the best of both worlds: liquid funds that grow and wealth you build over decades.
TL;DR: The market faces ups and downs, that’s just what it does. We love those ups and despise those downs. But by preparing for them and using all of the tools at our disposal (starting with DCA and diversification), we can ride out the bumps.