The stock market crashed, but I didn’t panic and neither should you

Ramit Sethi.
Courtesy of
Ramit Sethi

• A stock market crash, or a dip, can cause even smart
  investors to panic.
• Ramit Sethi is the author of a best-selling book on
  personal finance, and when the stock market dipped, he lost
  $75,000.
• He isn’t worried, because he knows successful investors
  play the long game, and that opting out of the stock market is
  far riskier than opting in.

Last week the stock market took the world on a wild ride, and in
response, the media went crazy with scary headlines like …

The goal of these headlines is to get people to click, and people
will, but the average investor is left only with doubt and
scary-looking losses. Just look at this Instagram message asking
me for advice:

Ramit Sethi

As an author of a
New York Times best-selling book on personal finance and
someone with a portfolio of investments, I’d like to share this
piece of counterintuitive advice:

Keep calm and carry on.

In other words, don’t change a thing!

Don’t get me wrong. I was greatly affected by the decline. You
can see that my portfolio dropped by over $75,000 in just 12 days
of this month:

Ramit Sethi

Ouch.

Most people who lose $75,000, $2,000, or $500 would freak
out,  sell
their stocks, and say things like “I would just hold cash to
be safe” or “See, this is why I don’t invest in stocks!”

But here are three reasons why I kept my investment portfolio
untouched — and why you should stay disciplined, whether your
portfolio is worth $500, $50,000, or $500,000.

1. Keep investing and you’ll get investment returns no matter
what

Some years the stock market is up, some years it’s down. Before
last week, in fact, the S&P 500 had been in thegreen
for 13 consecutive months (the last time this happened was
1959).

But the big picture here is that as long as you’ve diversified
your investments, the stock market returns, on average,
approximately 8% after inflation.

The
Measure of a Plan

Having a bigger picture of the market and its history helps you
with your financial goals, and also helps you understand that
emotional decisions, like selling in a panic and chasing after
“exciting” stocks, actually HURT your returns down the road. That
brings us to the next point.

2. It’s not ‘timing’ the market, it’s time IN the market

Some people talk about “timing” the market to miss the bad days,
like last week, but we’re terrible at
predicting market swings. This means you could miss both bad AND
good days and dramatically impact your returns.

Yahoo
Finance

The above chart shows that if you have someone who STAYS in the
market between 1998 and 2017 with an investment of $10,000, they
would get a 7.2% return — that’s $40,135!

But if they missed the five best-performing days,
they would instead grow to $26,625 — a return of just 5.2%,
almost 30% lower. That difference could be worth hundreds of
thousands of dollars to you.

This study by
University of Michigan Professor H. Nejat Seyhu shows that
overall your return in stock market is consistent and improves
thelonger you stay in it.

3. It’s pointless to look at daily trends

You might want to check investments regularly, but
once you
automate your money you should be checking once every six to
12 months. In fact, I wouldn’t have known about my losses if I
didn’t notice Twitter having a meltdown over it.

The way we think about investments is totally backward. When the
price of toothpaste or gas drops, everyone is happy and buys
more. But when the price of investments — likes stocks or houses
— drops, everyone flips out and starts thinking of selling.

It should be the OPPOSITE.

Lower prices are good as long as you have a long-term goal. If
you’re young, that means you can pick upmore
sharesof the stocks at a lower price. For people who are
older, they would benefit from adjusting their asset allocation
to be more conservative so that declines affect them less
dramatically.

I’d like to encourage you to go from “hot” to “cool” around your
money. Instead of feeling “hot” emotions like anxiety or fear,
get educated enough to feel “calm” and “confident.” I feel calm
because I know my money is automatically being invested every
month, that staying in the market gives me much better returns
than panicking and selling, and I can focus on other parts of my
life.

Long term investments shouldn’t affect your day to day. Whether
you lose $500 or $5,000 — or gain $50,000 or $2 million over time
— the important thing is to nail down good personal finance
habits so that when your portfolio grows in the future you’d
exactly know how to react and can stay strong with your
investments for years to come.

Reality: Investing isn’t supposed to feel like an exciting
Hollywood movie. Your investments should be boring, passive, and
automatic.

Because that’s what real investors would do.

Ramit Sethi is the author of the New York Times bestseller,
“I
Will Teach You To Be Rich,” and writes for more than 1
million readers on his websites, iwillteachyoutoberich.com
and GrowthLab.com. His work
on
personal finance and
entrepreneurship have been featured in The New York Times,
Wall Street Journal, and Business Insider.