Historically, the market always recovers from a significant downturn, but your decision about how to react to a downturn depends most on your particular situation and your age.
Last time I discussed historical returns after significant market downturns and how selling during a down market can potentially leave you worse off than staying in it.
While the stats show that markets usually recover, what should you actually do? I think that depends on your particular situation, but there are some general guidelines, broken down by your age.
Ages 30 to 45
If you just finished residency or have been practicing medicine for 10 years or fewer, you’ve just been handed a fantastic opportunity. There is generally an inverse relationship between today’s prices and future returns, so lower prices today usually mean that you can expect higher future returns.
The problem is that you aren’t guaranteed higher future returns, and you don’t know when they’re going to happen. That’s part of the risk of investing. So you have to be incredibly patient with this and continue saving and buying more stocks at these prices.
Taking it one step further, you should hope that prices fall even more for the next several years so you buy at even lower prices. Realize that you’ll be doing this when there’s no good news and you feel like the world is coming to an end. But that’s how you generate the returns you want to fund your retirement. So keep socking it away.
Ages 45 to 55
In the middle of your career you’re still saving and investing more in the market, but one thing you have to keep in mind is the possibility that prices won’t recover for a long period of time
say at least a decade.
Many physicians I speak to say they can’t possibly work full time when they’re 60 years old. So if you’re 45 years old and you’re thinking about retiring at age 55 from practicing medicine, you should be prepared to work longer or save more now to make up for losses.
Ages 55 and older
Just when you get a glimpse of the finish line, it moves further away. If you’re just about to retire or entered retirement this year, you should be very worried if you don’t have a plan.
Remember the market doesn’t recover swiftly every time
like in 2001 to 2002. Or consider 1965 to 1981, when U.S. stocks underperformed bonds for 17 years. That means you need to make some critical adjustments:
What monthly expenses are you going to cut?
Will you work part time to generate income to make up for portfolio losses?
Should you change your asset allocation and reduce risk in your portfolio?
Ultimately, you need to figure out whether you’ll outlive your money. That’s the crucial question for everyone and a topic I’ll discuss in more detail in future columns.