Right now, the stock market has been down over 20 percent, rallied some, and is going negative again. There is no good news in sight. I mean, literally, everywhere you turn, there is bad news about the economy. Bad news with gas and oil prices. A recession is on the horizon, which many predict we’re already in. And when you look at your 401(k), you may be tempted to look at one specific number and panic. However, we should have a different focus during these harsh bear market times.
First, just don’t panic.
Now, what is that number you shouldn’t be focusing on? It’s your portfolio value. It’s the amount of money you have available should you cash everything out and run for the hills.
So, don’t concentrate on that number. Instead, you should have a different focus during bear markets.
And in fact, don’t even concentrate on most numbers in your stock portfolio statement at all, except one. What is that magic number you might ask? It’s your portfolio value. It’s the amount of money you have available should you cash everything out and run for the hills.
A Different Magic Number
Everyone seems to concentrate on one’s portfolio value. And why not? It’s up there on your statement, big, bold, and in your face. It’s the one that seems to have to most meaning, right?
Wrong.
Instead of focusing on your account value (which will go up and down every single day the market is open) isn’t what will help you in the long-term. It won’t be the guiding light to which you can put your trust in.
Instead, you need to be focusing on the shares, not on the value of your account.
What do I mean by this?
Number of Shares
Every time you get your paycheck, and you have automatic deductions towards your 401(k) or 403(b), you’re buying additional shares of that mutual fund. If you’re trading in a regular brokerage account, you’re purchasing shares of a company or ETF.
With each transaction, the number of shares keep going up.
This is different than the account value of your portfolio. Each day, there is a certain dollar value on those shares. Sometimes, it’s up, especially in a great bull market when the trend is upwards. And sometimes the value is down, like right now when the general market is 20% or more in the hole.
But your shares remain the same and increase with each purchase regardless of what the stock market is doing (unless you’re selling, of course).
The Value of your Shares
When the stock market recovers, share price goes up. This is turn is easily seen as your portfolio value increases.
Most of us know this already, but when the stock market goes down, those share prices get cheaper. Thus, you end up buying more for the same contribution amount. When the market recovers, you have more shares now worth more money. It’s simple math. Your account grows.
The Psychology of Shares vs Value
It’s easy to see our portfolio drop 20 percent and panic. Heck, if you’re fortunate enough to have a larger account, a 20% drop on a $500k account is a $100,000 drop! That’s a lot of money.
Many of us will then begin to think, “I’m down $100k already, I don’t want to lose more if the market collapses, so I’ll sell some now to prevent more losses.”
What this does is lock in our losses. Historically, if we just left this account alone (especially if you have a longer time horizon before you must retire), you’ll come out ahead. If you sell, you realize those losses immediately.
Then you come to the period of, “when do you get back in the market?” Many of us will hesitate until many months of a full-blown bull market and will miss out on significant gains.
If instead, you concentrated on shares vs value, the psychology changes.
In a down market, your shares won’t drop. That “potential” of what those shares can do in the future will still be there.
There is a possibility that you’ll start to see the bear market as an advantage to your situation. Prices will be “on sale” compared with what they used to be.
If we just let ourselves start thinking of bear markets as opportunities, we will want to add to our positions, to buy more shares while they’re cheaper. In the long run, this will benefit the “value” part of our craving when the stock market recovers and those higher number of shares are now worth a lot more.
What to do with new Cash
Another pitfall we can get ourselves in is taking new money (all those continuing contributions in our 401(k) plans) and just letting it sit as cash versus investing in the market.
It’s easy to get the mentality that you’re just “throwing good money after bad” when stocks are down 20%. We tend to want to “protect” all the new money going in so we change our stock selections to a money market equivalent within our plans.
This means that money won’t grow.
Rather, we should be buying more shares of great companies or mutual funds while they’re cheaper. If we found a great sale for something we wanted online, we would snatch that opportunity up if we could buy it for 20% cheaper.
We should be thinking the same here. Buy more shares while they are cheap!
Summary
It’s easy to be scared during bear markets. Psychologically, we react very different when there is nothing but bad news on the horizon. It’s easy to want to protect your investments.
When we look at our portfolio values, it’s easy to jump to conclusions when you feel like you’ve “lost” tens of thousands (or hundreds of thousands) of dollars.
Instead, have a different focus during bear markets. Concentrate on the share numbers instead of the value of your account. The value of your account will always fluctuate. Take control where you can and increase those share numbers instead. They will be easier to look at and not get drawn into the panic feelings of the day.
In the long run, your account – and your retirement – will appreciate the different focus.
Latest posts by David the Wealthy RN (see all)
- Five Negative Aspects of the 401(k) - July 19, 2023
- How To Think About Bear Markets - April 8, 2023
- Live Paycheck to Paycheck the Right Way! - December 26, 2022