No, plunging stock markets do not mean you’re a terrible investor

The best thing you can do for your finances right now is to keep calm and carry on.

The markets are as scary right now as we’ve seen them since the 2008-09 global financial crisis. If you’re new to investing, welcome to your first full-on financial market freak-out.

All the indicators we use to tell us how we’re doing financially are screaming back at us. Stocks are plunging and so are interest rates in the bond market and oil prices. Taking all of this in, it’s normal to second guess all the decisions you made about money in the recent past.

This is a terrible time to make judgments like this. You’d be reacting to a rush of rapidly changing data and interpreting it under stress. Even the experts don’t know exactly what’s happening, and why.

Got an investment portfolio that’s mostly in stocks? This is not a mistake in any way if your goal is to build wealth over a long period of time, say 10 years or more. Retirees, you’re in this group, too. If you’re 65, you might have 20 years or more of investing ahead of you.

Retirees who need to dip into their investments to cover their expenses are fine if they have taken the always sensible precaution of keeping at least a year or more’s worth of living costs in cash or short-term guaranteed investment certificates. Draw on this money and give your hard-hit stocks time to recover.

Young adults are known to be somewhat conservative as investors in many cases, so this market decline has to be hitting them hard. But there’s no demographic less vulnerable to a stock market decline than a twenty- or thirtysomething with a long-term outlook. When someone at this age retires in 35 to 40 or so years, they’ll have average annual returns from the stock markets in the 5-per-cent to 6-per-cent range, including the declines of early 2020.

Likewise, it wasn’t a mistake if you put a little money into the stock market over the past two weeks. Making small purchases of stocks on days when they’re plunging in price is exactly the right thing to do. Stocks may go a lot lower, so keep buying here and there. That’s how to position yourself for the rebound to come.

Kicking yourself for not selling stocks last week? Forget it. Most sellers in a plunging market end up on the sidelines watching the market bounce off its eventual bottom.

One of the ways to ease the worry of seeing financial markets in an uproar is to look at what’s going right with your finances. If you have some cash parked safely in a saving account, then you have the resources to deal with the unexpected. If you don’t have a cash reserve, there’s still time to fix that.

If you’re planning a big expenditure, consider scaling it down or postponing it and using the money to build your savings. Now seems an inopportune time to be bold in your spending unless you’re highly confident that your job and income are solid.

But let’s be clear about something – the economy needs you to spend normally right now, and not just on buying a truckload of toilet paper in case you’re quarantined in the fight to contain the coronavirus. The virus is causing a shock to the global production and movement of goods and services. If consumers stop consuming, the damage to the economy is compounded.

Concerns about the economy are why interest rates are falling fast and may go lower. While we should all have money parked safely in savings, we have to accept that returns on these funds are weak.

Do not second-guess your decision to save on this basis. The main reward of saving is not earning interest – it’s having money at hand to use as needed for emergencies or to reach goals such as travel, home buying and more. Also, an economic slowdown will stifle inflation. On an after-inflation basis, low rates on savings may not look too bad.

Finally, low rates are excellent news for people carrying debts on lines of credit, mortgages and floating rate loans. The interest burden is easing at a time when you could probably use a break.