It's all over headlines, FED talking about raising rates, inflation going up every month, Russia invading Ukraine. We all know what this means for the markets. More fear, more uncertainty, a crash is down the corner. Is it?
Nasdaq and S&P500 are down -12.5% and -7.5% from the recent high at the time of writing, and things don't seem to slow down any time soon. But wait, when there's fear, there's also an opportunity, so don't panic just yet.
Negative news, panic, and drama
The media needs your attention, and they are all fighting for it. They need drama to make money, and when there's a crisis, a brink of war, breaking news, a stock market collapse, the media is going to flood you with massive clickbait.
Youtube is no different. No wonder why the best-performing videos are the ones talking about the imminent stock market crash, fueling the fear even more.
Let's take a step back from the news today and see what some of the headlines were a few years ago after the stock market crash in 2008.
2010 - (Euro zone debt crisis): CNN - Investor fear is back - worries about Greece and the European debt crisis
2013 - (Federal Reseve to taper stimulus): CNN - Stocks have been on a wild ride lately and experts say investors better buckle up - It's been drifting between extreme fear and fear for the past several weeks. Before Federal Reserve chairman Ben Bernanke began his taper talk last month, the index was firmly entrenched in extreme greed.
2016 - (Brexit, US elections, plummeting oil prices) - The Guardian - Stock markets plunge as investors fear global economic slowdown - Global shares tumbled again on Wednesday as fears of an economic slowdown escalated and the oil price hit lows not seen since 2003.
2018 - (China trade war, rising interest rates) - CNBC - Dow plunges nearly 800 points on rising fears of an economic slowdown - Stocks fell sharply on Tuesday in the biggest decline since the October rout as investors worried about a bond-market phenomenon signaling a possible economic slowdown. Lingering worries around U.S.-China trade also added to jitters on Wall Street.
I can continue on forever. The media will flood you with negative headlines and fear every year. They only care about the money they can make from the audience.
What did the stock market do since?
- Since 2010 S&P500 went up 316%.
- Since 2013 it went up 201%.
- Since 2016, 104%.
- Since 2018, 60%.
Should you sell your stocks?
We face this hard question yet again, should I sell now? Should I wait for the 50% crash and get back in after?
If you follow the mainstream finance channels out there on youtube, you may have heard some of your favorite YouTubers making big moves with their portfolios in preparation for a stock market crash, literally changing their mind overnight and selling their entire portfolio like there's an impending apocalypse.
Is this the right thing to do? Most likely isn't, and most certainly not if you have a long-term investment strategy. If you are a trader, you may be able to time the market in the short term, but the probability of success is very slim in the long term.
Not to mention you should NOT listen to a random guy on Youtube drawing lines on a chart that the world is about to end and stock will fall 50% any minute from now. I can also be guilty of such drawings on charts, like the one above, and you shouldn't even listen to me either. It is your hard-earned money. You should do the research carefully before panic selling or blindly following some bad advice.
To be clear, I am in no way pretending that I know what's going to happen, but what I can tell you is that selling stocks that have already lost 50% in value is statistically an incredibly bad idea. That unless you bought some bad stocks without doing the research and the valuations in the first place.
The reason why it's a bad idea is simple. Looking at the logarithmic chart of the stock market below over a period of 150 years, we can see that the market rebounded every single time and went on to new highs.
If you were to sell out every time the stock market dropped 30-50%, you would have missed out on some of the biggest returns in history. Not to mention that the stock market crashed more than 50% only around 6 times in 150 years, and more than 20% around 18 times. If you think about it, that's a pretty low chance you would have timed that crash.
These events can be frightening, and seeing your portfolio lose money can be very painful. What's certain is that if you buy good businesses, they will always go up in value as the economy grows. What makes you buy a company you like at $100 but sell it at $50 if nothing changes fundamentally? If anything, this should make you happy you can buy a great business at a significant discount.
Bottom line
Always remember that I am not here to tell you what will happen. Historical stock market performance is irrelevant as conditions today are way different than what happened in the past. Anything can happen. However, I am here to tell you that you need to take your own investment decisions and not take rash radical actions on your portfolio just because you heard someone spreading the panic news.
