No question about it, stocks are in an asset class all by themselves when it comes to delivering performance for investors.
No other asset class–bonds, commodities, real estate–offers the stable, long-term inflation-adjusted returns of stocks. Over the long term, risk decreases the most for stocks.
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The short run is another matter. Stocks can soar beyond reason and plummet to nerve-wracking levels.
Morgan Housel of The Motley Fool notes: “Markets crash all the time. You should, at minimum, expect stocks to fall at 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime.â€
Now imagine this: You’re over 50, say 55, with retirement on the horizon. You have a modest pension from your employer. You contribute the maximum to your employer-sponsored 401(k) plan. You put money in an Individual Retirement Account. Your goal: retire at 60.
Your plans go awry when a coup topples the Saudi rulers, a black-swan-event triggering a crash that morphs into a worldwide financial crisis. The market craters–not just a 10% correction, but a 40% plunge.
What steps can you follow to regain your financial footing?
*Don’t panic. Don’t bail out on your investments. Too many investors let their emotions get the best of them. They succumb to fear. As the market swoons, they run for the exit, all trying to get out at once–only making matters worse.
*Seek expert advice: No matter how fundamental your grasp of investing, there is always something to learn from a sophisticated professional, especially in a time of crisis.
*Use the plunge as a buying opportunity. Understandably, you may be loath to buy when pessimism pervades the market.
“You have to be a contrarian with your emotions,†says Meir Statman, a finance professor at Santa Clara University in California. “In fearful times, people think that returns will be low and risk is high… . This is a natural emotion. Find ways to counter it.â€
You have years to go before your retire. You won’t be drawing on your nest egg for a while. Snap up stocks at rock-bottom prices. Buy companies that had pre-crisis strong financials.
Financial meltdowns eventually end. After the 2008 global financial crisis, the market regained its pre-crash level in 230 trading days. These are times when long-term wealth is created.
“Equities promise their owners nothing. Stocks are risky investments, involving a high degree of faith in the future,†says Jeremy J. Siegel, a finance professor at the University of Pennsylvania’s Wharton School.
They can produce gut-wrenching losses in the short run, but they are the most lucrative investment in the long run.
Let’s face it: They are the only way for you to hit your retirement targets.
At age 55, you have enough working years ahead for the market to give back what the crisis took away.