The stock market downturn isn’t as bad as you (probably) think


Jhe stock market has just completed its worst first half in more than five decades. With the S&P 500 Index in a bear market (down more than 20% from its previous high), it’s easy to get discouraged, especially if you’re watching your 401(k) closely.

It’s times like these that perspective is all-important: despite how painful the downturn can be, your portfolio is probably doing just fine.

Taking the recent downturn into account, the stock market’s three-year annualized return “is still above 8% per year, which is pretty good,” Anqi Chen, deputy director of savings research at the Center of Retirement Research from Boston College. Money said. This is thanks to a sustained period of strong equity growth between March 2020 and the end of 2021, fueled in particular by the rise of the technology sector.

Even so, it’s probably hard to feel good about those gains right now. You can blame your brain.

On the one hand, it’s hard to grasp how unusual the high returns of the past few years were in the grand scheme of stock market ups and downs. This is thanks to a psychological phenomenon called anchoring bias, which keeps investors obsessed with specific information that overshadows other facts, instead of keeping the big picture in mind.

“We’re filtering the decline in stock prices from the peak,” Chen told Money, “rather than a longer story.”

There is also a bias called loss aversion, which makes the pain of losing money much more intense than the happiness associated with gaining the equivalent amount. That’s why it’s common to feel discouraged (and compulsively check your 401(k) balance) when the market is down. It’s also why it’s easy to forget about your investments and take things for granted when stocks are doing well.

A related phenomenon called the endowment effect, which describes how people perceive the things they own as more valuable than their true market value, is also at play. For this reason, investors may feel attached to their last two years of rising stocks even though they made no gain selling them, Chen says.

A bear market can be a buying opportunity

If you’re worried about your portfolio losing value this year, remember that those losses only materialize if you sell. Thinking about the long-term horizon of your investments can also help. Stocks typically recover from bear markets in about two years, and the market has never had a negative annualized return over a 20-year period.

While a downturn can be scary, it’s actually the best time to leave your money invested, provided you have a long-term strategy and can afford it. Making changes to your portfolio due to short-term volatility is never a good idea, and staying invested will ensure you don’t miss out on future good days.

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