"...So, what the heck just happened? More importantly, what can we do about it?"
Hi I’m Mike Frontera and welcome to another edition of Retirement Insights.
Well, what a difference a month makes! There was very little debate about what I wanted to talk about this month. Financial matters can kind of lie dormant in our minds- until they becomes headline news! I’m talking of course about the stock market. So, what the heck just happened? More importantly, what can we do about it?
First, I think it’s fair to compare what we’ve been seeing with these large market swings to what we’ve been seeing in the months beforehand. We might have been lulled into a sense of security by the utter lack of volatility that we saw in 2017.
And I think many of us started to take what happened last year as the norm. And that’s certainly not the case.
Not even close. Do you know that we didn’t even have one down month in the S&P 500 last year?1 Do you know how rare that is? The last time that happened you have to look back almost 60 years to 1959. And we had those positive monthly returns without almost any bumps along the way. If you just take a measure of the average daily change of the S&P 500, you'd have to go back more than 50 years to 1964 to find a year that had less volatility1. So while it was great to have, it certainly is not to be expected every year. Highly unusual indeed.
What’s not unusual is a market correction. And officially we just had one in the S&P 500. A market correction is defined as a 10% drop or negative return in a market2. And while
2017 didn’t encounter a correction, you don’t have to go back to the 50’s or 60’s to find the last one. No, the last one happened in 20163. The one before that? Was in 2015. Then again in 2011, and the year before that, and the year before that, and the year before that. So the first thing to do is to know that these market occurrences, while they're certainly unpleasant, are by no means uncommon.
And almost every time you have a correction, there will be plenty of news outlets willing to tell you that this time it’s the “big one”.
Here’s an article about the “crash” this year. Here’s one about the “crash” in 2016. Here’s one about the “crash” in 2015. And here’s one about the “crash” in 2011. You get the picture!
So it’s important that while we watch the news and we read the news, that we understand that the media is in the business of selling headlines. And they may be quick to declare a correction, which is a relatively common market event as a market crash, simply for the sensation of it.
Negative news tends to hold our attention more than positive news. That is one other aspect that we need to be aware of in our investing lives. It’s a phenomenon known as “risk aversion” and it refers to the finding that people tend to be more fearful about losses than they are happy about gains4. This risk aversion is what makes people want to pull money out of the market during a downturn. And simply being aware that you may have this very common bias may actually help you stay the course on
your long-term investment strategy.
And that is my final suggestion. Your exposure in the market needs to be properly diversified and it needs to be part of a disciplined long-term investment strategy. One strategy that is shaped around your unique goals. That’s why I’m such a proponent of using a comprehensive financial plan to help direct your investment decisions. Your plan, for example, might help point out that you need some part of your portfolio to have little or no market risk- say for funds that you need to use in the next 5 years. Maybe part of your plan involves not just providing income now but also 20 years from now. For the money you won’t tap until 20 years down the road, maybe that’s a place where you can accept more market risk.
That way you won't have to worry as much about the day to day fluctuations since you know you have 20 years before you must access that money. Now don’t get me wrong. A comprehensive plan may not alone make you immune to anxiety when the market suddenly corrects. As Mike Tyson rightly pointed out “everyone has a plan-- until they get punched in the mouth.” But having a plan that addresses how much money you need, when you need it, and how much risk you’re willing to take to get it can help tremendously in keeping you on track toward those goals. Combine that with your own self-awareness of our risk aversion biases and taking the stock market news with a healthy grain of salt, and
you’ll be that much closer to being able to maintain the discipline that is necessary to carry out your financial goals.
Do you have questions for me? Give me a call me at (518) 612-1060, or send me an email at email@example.com. Do you follow me on Facebook? I think that you should! You’ll can get blog and article shares and videos like these on everything retirement planning. Once again, thank you for joining me. See you next time.
- https://www.financial-planning.com/opinion/taking-stock-of-s-p- 500-dow-iones-in-a-weird-vear
- http://time.com/monev/4207790/stock-market-losses-gains- graphic/
"Market Crash" Headlines