Why You Should Stay in Stocks Even When the Market's Falling

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I remember it like it was yesterday. The last few months of 2008 tested the mettle of even the heartiest stock market investor. Daily I talked with investors who decided to sell out of their portfolios entirely. When you see the Dow (^DJI) plunge 500, 600 or 700 points in a day, it makes total sense on one level. Investors see the ship sinking, or at least they fear that's what's going on, and they want a life preserver while there's still one left.

Fast forward to today, and the fear is still there. We start hearing about whether or not it's time to get out of the stock market, especially when the media seems to only report on bad things. If you're going through that mental exercise of whether or not you should jump ship, consider these reasons why you should stay the course.

The Media Does Not Know Your Situation

Members of the financial media have one job ... to get ratings. That's not bad, per se, but in their pursuit of that goal, they will tell you things like this:
  • The sky is falling.
  • There is much to be afraid about.
  • Conditions are ripe for a pull-back.
Truth be told, conditions may be ripe for a pull-back. No one really knows. However, what I can tell you is that members of the media do not know your specific circumstance. Various pundits may come across as great stock pickers, but they don't know your situation. They aren't tailoring their recommendations to you; they're fear-mongering. The atmosphere of fear this creates will be an even bigger problem for you if you're an emotional investor. While it can be difficult to separate your emotions from your money, try. Fear will often lead you to make irrational decisions that may not be in your best long-term interest.

Simply put, it's best to put the financial talking heads on mute.

You Will Lose Money by Jumping Out

I know it seems counterintuitive, but you will lose money by jumping out of the stock market due to fear. Going back to the emotional argument, the stock market runs on 90 percent emotion and 10 percent reason. It is doing what it should be doing -– going up and down.

Consider this. During the plummet in 2008, the S&P 500 (^GPSC) lost just over 38 percent of its value. Retail investors jumped out at various points of the downturn and might have saved themselves from some of those losses. However, many continued to stay out of the stock market after it hit bottom due to fear of losing more money. That makes sense on one level, but it's shortsighted. Those emotional investors (and thanks to fear, non-investors) missed out on the S&P 500 more than doubling from 2009 to 2013. Pulling out now, especially when you stay out long-term, is a recipe for losing money, not making it.

You Have a Goal That Needs Long-Term Commitment

Most of us have goals that require active investing. The stock market, whether we like it or not, is going to have these short-term blips. It is going to have day-to-day swings, and some swings might be wild. Jumping out when the market appears to be tumbling is not going to help you reach those long-term goals.

I know this can be difficult when you're seeing your retirement account balances go down. I deal with that myself, and I've spoken with thousands of investors who've dealt with the same thing. But we should not allow this fear to derail our investment plans. Instead, it should encourage us to keep our focus on what matters -– the long term and how we're going to reach our goals. That might mean making slight tweaks to your asset allocation or looking for opportunities to invest in, but overall, it means keeping a long-term vision that withstands the market's daily swings.

At the end of the day, the stock market is going to fluctuate. Success requires focusing on the big picture. If your desire is to grow long-term wealth, that will serve you much better than listening to any doomsday predictions.

John Schmoll is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. He is a father, husband, and veteran of the financial services industry who's passionate about helping people find freedom through frugality. He also writes about wise ways to manage your money at WiseDollar.org.

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