Should Investors in their 20s and Early 30s be Concerned?
The short and sweet answer is no. If you are in your mid-30s or younger, the great news is that you have time on your side.
Every single recession has been followed by a significant move higher in the stock market.
Every single time.
In fact, since the drafting of the U.S. Articles of Confederation in 1777 there have been 48 official recessions. More importantly, and more relevant to the current cycles of the economy, there have been 11 recessions since the end of World War II in 1945. What has the stock market done following each one? Hit new highs. Another relevant and important statistic is that the stock market reached a bottom and began to rally higher before each of those 11 recessions ended.
Every single time.
If anyone is under the age of 34 and worried about the upcoming recession, realize it is in the short term and everything will most likely be back to normal again within months or a few years. The bigger concern should be about potential job loss rather than current investments.
As a young investor, you just have to get through the difficult period and not do anything silly while you are going through the recession. That includes panic selling stocks, bonds, or any asset you are worried about losing value during the recession.
What About Trying to Time the Market Bottom?
Timing the stock market is extremely difficult and very few individuals can do it with any success. In fact, history clearly tells us via equity inflows and outflows that investors buy when they should be selling and sell when they should be buying.
All you must do is ask yourself these two essential questions:
If I am selling my long-term positions now, who is buying them from me? At the same time during up-trending markets, if I am buying these positions now, who is selling them to me?
The answer is always the same. Large, capitalized institutions. They buy when retail sells. They sell when retail buys. Don’t believe me? Just look at any long-term equity inflow/outflow chart. It’s no surprise to professional investors that after years of equity outflows from 2015 – 2020 that stocks rallied higher into the COVID panic sell-off. During the COVID panic, retail continued to sell. Guess who was buying? That’s right. Institutions. Just like they always have.
Is it any surprise that as soon as retail investors started to buy stocks, with equity inflows exploding higher during 2021 and continuing to increase through 2022, that the S&P 500 topped in January 2022?
It is not. If the market takes a turn lower in 2023 as we go through the recession you can be sure mom-and-pop retail will sell and the other side of the trade will be the smart large capitalized funds.
What You Should do as a Young Investor
If you are young, and the market begins moving lower, the last thing investors should do is sell. In fact, smart long-term investors should be buying every dip. That is if you want to retire wealthy. The only free money in the world is compound interest, and you get the best yields during corrections and bear markets.
Too many investors, especially young investors, make this critical mistake when it comes to investing: They think they can outsmart the market and try to time the market by buying on the way up and selling on the way down.
This usually ruins their long-term dollar cost averaging. In poor market environments, smart young investors will add to their long-term holdings by buying quality investments and increasing their capital exposure to those stocks on the way down.
They do this knowing that every recession has led to an explosive stock market rally once the recession has ended.
What are the smart young investors doing right now for their retirement? Buying stocks. Buying mutual funds. Buying bonds. Buying real estate.
They know in five, ten, fifteen, twenty, or fifty years that every quality asset purchased lower will yield greater returns when this recession ends. It will end. They always do. Don’t mitigate your long-term returns by selling when you should be buying.
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