As a pro who’s been in the business for some time, I find it hard to get riled up anymore about market corrections. They come and they go. They present great buying and selling opportunities, but little else. However, I know that clients do get nervous – after all, how can you not become panicky when you see headlines screaming doom and gloom about the economy?
Yesterday evening, Yahoo Finance declared, “Wall Street Slammed as Investors Flee to Safety“. To further lure the reader in, we are treated to photos like the one below, showing an institutional floor trader (note that I didn’t say “investor”) having a really bad day.
So how bad was the so-called “slamming” the top three investment indexes took on Thursday?
The DJIA was “panic-stricken”, and down all of 1.6%. The S&P 500 was “battered”… a mere 1.23%. And NASDAQ took it in the shorts for a whopping 0.39%.
I hope my sarcasm comes through. If not, let me say it clearly: the only horror that happened today was media created, initiated, and propagandized. True, the markets were down. Slightly. They’ve been down, in correction territory, for about six weeks. This is a natural, normal, highly regular occurrence in the equity markets. But that sort of truth, sadly, doesn’t sell newspapers.
So what can you do to stay sane during times like this? Well, for starters, unless you are in this business or make a living day-trading, do your best to avoid the daily drama of the CNBC “horse race”. Markets go up and down, but over enough time, always up. For nearly every average investor, the kind nVest Advisors was created for, today, this week, even this month, mean absolutely nothing to your long-term investing goals.
Here are some of my friendly tips to help you have a better holiday weekend, and for the next few weeks:
Ignore the headlines, for your own sanity.
We live in the brave new world of click-bait journalism. I hope I don’t need to do an article or two about how seldom reporters check their sources or verify their data anymore. Or how much so-called reporting is written to back up or justify opinion rather than plainly state facts. But that’s because it’s not about accuracy or objectivity anymore. Objective reporting is dull. No, my friends, it’s about click-throughs: when you click on the article with the insane headline, the ad revenue register rings. And nothing makes you click more often than a scandalously misleading “doom and gloom” headline. Our new media has turned its profession into one huge perpetual Rick Roll.
Everyone on the financial news networks has a theory. Most have a book to sell or a fund for you to invest your money in. None have better long-term accuracy than a coin toss. But they say provocative things and they say them authoritatively. So they help the media lure in viewers and readers. That’s the purpose of most of the “talking heads” on these networks. And you can bet your bottom dollar, they have an agenda other than simply laying out their opinion for the betterment of mankind.
Let me give you a few examples of how following the headlines can be very hazardous to your financial health:
- “Stocks Dive: S&P at 3-month low”
- “Stocks Walloped by Mounting EU, Economic Fears”
- “Wall Street Goes Bearish On Stocks”
- “Stocks worst week in 5 months”
Sound familiar? They probably sound like a lot of the headlines you’ve been reading the past week or two. Except they’re not. These were all headlines during the month of May… 2012.
Now was there a crash? Was there calamity, massive loss of wealth, 401k accounts bottoming out? Well, yes and no. Yes, if you start your investing timeline on March 31 and end it on June 4. When I cherry-pick the dates, sure, I can find an ugly chart. In that 9 week period back in 2012, the DOW fell a whopping 8.77%, most of that in less than two weeks.
Do you even remember that drop? Even with such horrifying headlines?
How about the significant drop in September 2010? Or spring of 2011? Or the one in 2013? Or even August 2015? We don’t remember them because ultimately, they didn’t matter. At least, not if we stayed invested. Let’s expand the chart above, and add three more months:
Not a pretty chart, to be sure. We had a lot of uncertainty during that time – no congressional budgets, an election about to happen, a credit downgrade, the ever-present fear of debt in the EU, the new Obamacare law. Lots of things to worry about. And still, if you had stayed invested, you’d have ended up 1.92% from an April 1 start. In 6 months. With a nearly 9% drop early on.
Now let’s give that chart 3 1/2 years’ more objectivity. Even using today’s closing figures and the lousy start to 2016, if you had been invested on April 1, 2012, and stayed invested through Thursday’s close, you’d still be up 19.91%.
I always need to tell you whenever we pick a selection of dates and talk market performance, that past returns are, of course, never guaranteed to repeat. History doesn’t repeat itself precisely. But I believe it rhymes. Similar concerns and worries that afflicted the markets in 2012 will likely (and HAVE) worried investors in 2013, 2014, 2015, and yes, 2016. I hear all the time that, “this time, though, it’s DIFFERENT.” Yes, it is. And no, it’s not. Different catalyst, maybe, but always the same market reaction to it: fear which leads to selling which leads to lost wealth. Then the market rinses and repeats.
Is there a reason to panic during this correction? Absolutely not. Low oil prices will eventually spur broad economic growth. We all have a lot more money in our pockets when gas prices are so cheap for so long. Eventually, we’ll start spending it, creating wealth for the companies whose products we buy. All we need to do is wait. Does that concept give you optimism? You bet. But does it make you click through and read an article? Not likely. No, instead, a self-proclaimed Expert with a book to sell will make an outrageous claim that our media will capitalize on. And guaranteed, we’ll click on that headline.
You haven’t lost money. You haven’t lost your investment. Your shares have merely lost potential resale value. For now.
Let me step away from equity stock investments for a moment to help you understand this principal. Let’s talk about your house.
When you bought your house, you either put down your own money, or money you borrowed (or a combination of the two), to purchase your family’s home. When you took the keys from the title company, you had exchanged your money for this property. Yes, you live in it, but it is an investment nonetheless.
Now let’s assume that the real estate market in your area experiences a crash of some sort. Home values plummet. Do you feel the urge to sell your house and get out of it while home prices are down, thereby guaranteeing you a loss on your investment? Of course not. You simply wait it out. You know home values will eventually rebound.
Why do we act differently about other investments? When you bought your stock or mutual fund, you exchanged your cash for that investment. The investment will fluctuate in value, but your cash is in the pocket of the person who sold you the stock. Therefore, you haven’t lost “money”. Your investment simply is showing its current resale value in the marketplace – if you sold it today.
This is the single hardest thing for investment advisors to get through to their clients, I can promise you. Investors see a market drop and cognitively link their investment’s current theoretical sale price as an actual loss of actual money. Then they feel the totally human but totally irrational urge to turn that theoretical loss into a real one, and sell when the investment’s value is down.
This normal human reaction is also the number one reason you need a financial advisor to help you through the many corrections that will happen on your way to retirement; you need help to keep you focused on your goals and not the headlines. Yet, so many of us believe the panic we’ve been sold, and obey its errant call to rescue our money, leaving our wealth behind for savvier investors to pick up at bargain prices.
Let me share again one of my favorite analogies regarding market drops vs. your investments. When markets are down, it’s very much like the water is draining out of a swimming pool. Your investments are NOT the water. They are beach balls floating in that pool. When the water level drops, that means nothing whatsoever about the quality of the beach ball. Read more on that analogy in this article.
You’ll mess up forever if you let your feelings run your portfolio.
I often show my clients a graphic depicting the Cycle of Market Emotions (see below). The chart shows a typical, totally normal stock market growth and correction cycle, but more importantly, overlays the typical emotional reactions of investors during that same cycle.
As you can see, and I’m sure you experience it personally, when the markets are zooming up and approaching new highs, you feel pretty good about it. You might even want to put more and more money into it, since it’s done so well for you already.
At some point, the excitement and greed pushes stock prices above what can be considered a fair value, into a range I call an “Emotional High”. This is where investors should consider selling (if they market-time), but it’s not what most of us do. Instead, we keep feeding the happy feelings by piling more money in while stocks have sky-high prices. Not rational at all.
Then, like a rubber band that is stretched way out of proportion, the market “snaps back” to more rational prices (we call this a “correction” as the investment “reverts to its mean”), investors see a decline in share prices from their emotional high levels. Concern, fear, anger, panic, and finally surrender sets in.
Somewhere near the bottom, in “Emotional Low” territory, when stocks are very attractively priced, many investors turn their theoretical loss into a real one. You just cannot stand seeing the value of your investments drop so much, so you commit a second irrational act: you sell out when your stock prices are at or near the bottom of the cycle. Then the rubber band snaps back again.
So even though the old mantra, “Buy low and sell high,” has been around since the beginning of investing, we as individual investors are very prone to do the exact opposite.
Asset Allocation will help to smooth out the ride.
My final bit of advice this morning has to do with remembering that while the markets may be bouncing all over the place, no client at nVest Advisors (and most other retail investors in long-term accounts) are actually in “The Market”. You are, or should be, in our opinion, in a broadly diversified portfolio of stocks, bonds and alternative investments, to help smooth out the rough ride you’ll feel with one particular investment market.
All of our clients are invested initially in one of our model portfolios, based on your specific goals and needs and investing time frames. None of our clients are more than 90% invested in the equity markets (and certainly not all of that is in the US). But even for clients who are highly invested in stocks due to their unique risk profile, those investments are spread among large, mid, and small companies, in a variety of economic sectors and geographies.
We do this for a simple reason: no one knows which investment classes will be this year’s winner and which one will be the loser. We can make educated guesses, but that’s as close as it gets. You can see that in this chart, what we call the Mosaic. The chart, by color, ranks the various investment “asset classes” by performance year after year. As you can see, last year’s big winner is often this year’s big loser.
And we can’t invest your money responsibly by guessing. Instead, what we do as professionals is place the right percentages of your money at various exposures to risk, to try to give you the average historical rate of return you need to accomplish your specific investing goals. We call that “Asset Allocation” (incidentally, that’s shown in the boxes in the mosiac colored white, which you can see, tends to be a middle performer every year, avoiding the extremes of performance individual investments experience).
That sounds complicated. It’s not. In simpler terms, at nVest Advisors, we bring on enough risk to historically meet the returns we need to accomplish your goals, but not more. If your goals can be met with a 30% stock, 70% “not stock” portfolio, so be it. We don’t chase returns and we don’t invest you by trying to be financial phophets. Remember, not a single financial “expert” has a better long-term track record in picking winners and losers than throwing darts at the wall.
The Bottom Line
So what do you do today? Well, for starters, recognize fear as your investment enemy and refuse to indulge in it. The markets correct all the time. This, too, shall pass. As the British proclaimed during the bombing raids in London during WWII (a far worse situation than seeing your investments drop for a month, by the way): “Keep Calm and Carry On”.
The next thing you should do, however, is look at your current holdings to make sure they make sense for you. If this market caused you significant panic, you may need to adjust your allocations down to more accurately reflect your risk tolerance. Just don’t do this at the market bottom. Wait until things have recovered and then sit with your financial advisor and discuss your concerns.
Take advantage of tax loss harvesting in non-qualified (non-tax-sheltered) accounts. Tax loss harvesting means purposely selling one investment at a loss, and either buying another one very similar to ride back up, or else waiting 31 days and buying your original investment again. Tax loss harvesting can be tricky; be sure to talk to your tax professional before you start selling. (And nVest Advisors does not offer tax or legal advice.)
Consider rebalancing your accounts at market highs and lows. Rebalancing means returning your investments back to their original intended percentages. When you do them at market highs and lows, rebalancing can help you to “scrape the wins” at market highs and shift them into less volatile investments, and buy some stocks at lower prices during market downturns. Talk to your advisor about rebalancing.
And finally, talk with your advisor. Share your fears. Ask the tough questions. He or she is trained and tasked with helping you navigate the sometimes choppy seas of long-term investing. And if your advisor isn’t often available, or can’t give you the answers you need, consider looking around for a new one. If you’re not a client of nVest Advisors, but what I talked about here makes sense to you, maybe it’s time to change advisors! You’ll never know from a blog entry, though: Give us a call or schedule your own appointment today (by phone, online, or in person), to discuss the markets, your portfolio, and your concerns. Call us! We’d love to be of service. And you may be very happy that you did.
In any event, just remember your goals – they are the reason you put money into investments to begin with. Stay focused on what you want to achieve in the years to come, turn off the TV, and go enjoy your weekend.
All my best!
Jeremy Torgerson, CEO, nVest Advisors, LLC