Is “Stay the Course” good financial advice?

If you read enough articles on personal finance and investing, several common themes start to emerge including the adage of “stay the course.” This is especially prevalent after a significant decline in the stock market (i.e. 2022). However, does this seemingly sound advice actually make sense in your situation?

While I don’t know the specifics of your circumstances, it will be easier to “stay the course” if you have certain strategies in place including adequate “rainy day” funds, appropriate debt levels, and an investment plan built around your risk tolerance and financial objectives. If you’re losing sleep over the losses in your retirement accounts, it’s possible there’s underlying issues that need to be addressed as the stock market declines often enough that we’ll go through another 2022 again (but don’t ask me exactly when!).

Holding sufficient money outside of stocks is critical during times of uncertainty (which is pretty much all the time). A rough rule of thumb is to hold 3-6 months of living expenses in cash accounts such as savings or a money market fund. If you’re living off your retirement savings, an additional 6-10 years’ worth of income in bonds will also lessen the impact of a stock market decline.

If you’re struggling to pay your bills due to outstanding debt (especially credit card balances), directing your attention to the stock market is misguided. You would be better off paying down your debt and more importantly changing whatever behavior led to accumulating the debt in the first place (assuming you have some control over the underlying cause). As interest rates continue to increase, the cost of carrying debt also increases emphasizing the importance of reducing outstanding debt.

An appropriate investment plan identifies the percentage of your investments to allocate to stocks. While selling stocks after a steep decline is usually detrimental to your financial success, the worry you’re experiencing now may be a good indicator that once prices recover you should scale back your exposure to minimize the sleepless nights. If your plan is sound, this may actually be an opportunity to buy more stocks as you’re most likely underweighted relative to the desired amount.

For example, if your original target was 70 percent stocks but now you’re under 60 percent, you could buy stocks to get yourself back to the target. As prices recover, this will enhance your returns since you’ll own more shares growing in value.

Overall, if the alternative is panicking and selling everything then “staying the course” and doing nothing makes sense but if any of the above items apply to you then taking action is warranted too. Admittedly, one of the most important skills when dealing with your personal finances is knowing when to take action and when to “stay the course.”