When Should a Mid-Career Professional Stop Investing in the Market? 


When Should a Mid-Career Professional Stop Investing in the Market?

You’ve been consistently putting part of your income into the market every month. When the market was on the upswing and you saw your nest egg growing, it felt like a no-brainer. But what about now? If you’re a mid-career professional who has been working hard at contributing to your investment portfolio, are there cases when you should stop?

Here are a few cases I can think of where it could make sense to pause investing:

Your emergency fund isn’t robust enough or you have high interest debt.

If you don’t have access to cash to cover living expenses and potential emergencies, that’s the first issue to address. I recommend at least 3 months of expenses (including business expenses, if you’re self-employed). Without that, you could find yourself being forced to take on high-interest consumer debt or dip into investments (potentially having to liquidate at bad prices or triggering tax consequences).

Note that I said having “access to cash.” While the prudent choice would be to have the full emergency fund as cash on hand, more risk-tolerant folks may be fine with having part of those cash reserves accessible in the form of a low-interest line of credit (such as a home equity line of credit) or as an investment in low-risk fixed income (such as muni bonds).

You’re saving up for a near-term goal (like a house) or you’re facing a major life change.

Since it’s impossible to predict what the stock market is going to do in the short-term, it may make sense to start piling up cash if you know you’re going to need it soon. How soon is soon?

I use these stats as a guideline: Historically, a 1 year investment in the S&P 500 has a 73% chance of resulting in a positive return. Staying in 3 years increases that chance to 83%. So a good guideline may be to set aside cash for any big goal that you need to fund in the next two to three years.

Remember that it’s not all or nothing. Say you needed $250K for a house down payment – you may choose to put a chunk into cash while still adding some to your portfolio. Even in a worst case scenario where you hit a bad patch in the market just as you needed the funds, there’s likely ways to liquidate some of your securities without jeopardizing your portfolio.

Also if you’re facing a major life change – whether planned (e.g. career transition) or unplanned (e.g. loss of spouse, medical event) – it’s reasonable to build up cash until you have a better grasp over your situation. After you have time to let emotions settle, you can assess your needs with clarity and make a decision.

You can’t handle seeing your equity investments drop about 14% every year and decline by about a third every five years or so.

For the last four decades, the S&P500 has experienced an average annual decline from a high to a low of around 14%. About one year in five, this has turned into a bear market – a temporary decline averaging around 36% and taking an average of about two and a half years to recover.

So if the thought of seeing your equity investments drop by these amounts gives you serious heartburn, it may be time to revisit your strategy.

This doesn’t mean you should get out of the public capital markets altogether. The ups and downs of the stock market are exactly why equity investors have historically been rewarded with long-term returns of more than twice that of comparable bonds. In finance speak, we call it the “equity risk premium.” Over the last 200 years, stocks have consistently returned an average of 6.5%-7.0% per year after inflation.

Indeed, for the mid-career professional who is still earning and saving, market volatility can be your best friend. Assume you’re investing the same amount every month – when the market crashes, your regular monthly investment goes running out into the midst of the chaos and buys shares at marked down prices.

So ideally, you can find a way to stay invested in a way that feels palatable. This could mean revisiting your asset allocation and shifting towards lower risk assets. Or it could be utilizing financial strategies such as options hedging or low-volatility funds to help ease the ride.

The bottom line

Neither I nor anyone else can predict when this economic downturn will end nor when this market will bottom and start recovering. I can only point out the historical fact that sooner or later, they all have. And history suggests that the best market returns occur after the fall – the average 12-month return after the end of the bear market is 43%.

So while there are a few situations where a person should stop putting money into the stock market, I still cannot point to a better alternative for most people to maximize their chances of reaching their financial goals than staying committed as a long-term investor.