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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The stock markets are all manipulated by government economic stimulus.... Just like everyone believes the month of May will be a down time, all the insiders believe that at the end of every decade there will be a massive selloff. So because everyone believes it will happen, it happens. Even in the 1990's with all that money coming in and no need for a stimulus, there was still a tech bubble pop in the stock markets and a selloff due to people's belief in absolutes. All anyone has to do is sit on their cash till they see their favorite stocks selling for 50% of it's 52 week average once a decade.... Then they will double, triple, or quadruple their money depending on a few factors and timing. If you would have bought Citi when it was selling for 50 cents a share, after a 1 for 10 reverse split made your investment $5 per share, you would have multiplied your investment by 7 or 8 times. Ford was selling for $3 a share in 2009, how much is it now ?... Caterpillar was selling for $22 a share in 2009, what is it now ?..

Financial advisors are required by law to tell everyone the same propaganda about keeping their money in the stock markets and riding out the storms as well as diversification. It is all part of the Series 7 license. The government wants our stock markets to remain strong and stable, that is why they have tax breaks for 401ks and other incentives for common people to keep their money tied up in the stock markets. The state of Alaska dumps it's oil money into stocks, the unions all have their money tied up in stocks. IRAs, trust funds, etc, etc....

But, if you were a schmuck that bought Caterpillar for $82 a share in 2006, then you have waited 8 years for a lousy $20 per share profit...... Trading stocks is all about buying at the right time and selling just before the stuff hits the fan so you have a bunch of cash to jump on the right opportunities. If you sit on your stocks and weather the storms, then you are taking risk for squat. If a person would have sold Caterpillar for $82 a share in 2006 and missed out on $5 worth of dividends for 2 years, then bought back in at $22 a share, they would have multiplied their cash by 5 and be collecting around 12% of their 2009 purchase price in annual dividend payouts.

In the words of Charlie Munger.... there are worse things than sitting on a pile of cash.

Just like how most soldiers swear to defend the US constitution without a clue what it says... A lot of investors try to work commerce without a clue of what the business cycle is. The best advice I could ever give anyone is to learn what the business cycle is and what causes it to fluctuate.

August 11 2014 at 4:44 AM Report abuse -2 rate up rate down Reply

Long-term investing is not for the weak. My only problem after the 2000 crash was that due to my divorce, I wasn't able to build up a cash pile to use to buy at the bottom. I did better in 2008. We small investors are never going to have the inside advantages of the Rich, but we can still do respectably well even with a moderate risk portfolio.

My suggestion: Ask around, and find an advisor that sells investment advice without handling your money directly. Do as he suggests, and force yourself to only look at your portfolio at the end of each quarter.

One thing is sure: You aren't going to make 10% a year from a bank savings account.

August 11 2014 at 12:16 AM Report abuse +1 rate up rate down Reply
Hey, Martin!

Big investors need main street to stay in to be fleeced by instant trades and insider info.

August 10 2014 at 9:10 PM Report abuse rate up rate down Reply

Companies often by their stock back.

August 10 2014 at 10:37 AM Report abuse -1 rate up rate down Reply

Well, the good news is that some of us are out of debt and will survive no matter what happens.

August 09 2014 at 9:09 PM Report abuse +1 rate up rate down Reply

Sure stay in the tumbling market and be a hero.

August 09 2014 at 7:53 PM Report abuse -3 rate up rate down Reply

To Steve { i think }
Interesting stuff. You're lucky in a way. The stock market was at a 1000 in 1980. It was undervalued. It was a great time to invest in stocks.

Then the pc and internet changed the market. Those were super bull markets.

Its not the same now. The dow is 17,000 now. There's nothing like the pc or the net around.
The market is over not undervalued now.

I'm not referring ti cisco as an ipo or the 1980 or 1990 cisco. I'm referring to the 81.00 cisco.
There are thousands and thousands of stocks. Can you tell me which small cap will be the next cisco or apple ?

August 09 2014 at 7:07 PM Report abuse -3 rate up rate down Reply
2 replies to charlesbrk1's comment

The stock market in 1980 crashed 7 years later after several scams:

Life Insurance failures
Bank failures
Over priced housing collapses
Skimming and stripping down of businesses/ Chainsaw AL/Sun Beam
Common Carriers in the trucking industry bought and stripped down
Independent Trucking companies didn't pay over time so they low balled freight pick ups.

The 1980s were loaded with scam artisst and other crooks you might want to refresh your memory.

August 10 2014 at 11:10 AM Report abuse rate up rate down Reply
3 replies to Iselin007's comment

You already missed it..... Tesla Motors and Google

August 11 2014 at 4:22 AM Report abuse rate up rate down Reply

custer's last words. " would you look at all those blankin indians".

August 09 2014 at 5:08 PM Report abuse -2 rate up rate down Reply
1 reply to kitharris1's comment

I guess Custer didn't have insider information. Some people are stubborn.

August 10 2014 at 10:35 AM Report abuse -1 rate up rate down Reply

you fellows need to get a room.

August 09 2014 at 4:40 PM Report abuse -2 rate up rate down Reply

Only if you are stupid.

August 09 2014 at 12:22 PM Report abuse -2 rate up rate down Reply
1 reply to crimeslawyer's comment

You have to be stupid if you don't. Have invested since 1980 and it does it is very rewarding.

August 09 2014 at 4:38 PM Report abuse rate up rate down Reply