The stock market was down 5% over the last two days measured by the S&P 500 and it’s a good reminder that markets go down. Sometimes we can get lulled into forgetting how normal market declines are. I don’t know where it goes from here. We can’t predict the future. We can only prepare. This is something I tell clients often. But what does being prepared mean? It can mean many things and different things in different situations and for different people, but generally, it means having a financial plan and a diversified investment portfolio as part of that plan. It also means preparing your expectations.
Preparation with a plan
When you have a financial plan, you have a written guide, a roadmap, if you will, of where you’re going and how you’re getting there.
Most of our clients have a plan – we call it an IPRO (Independent Professional Retirement Overview). And although “retirement” is in the name, we plan for much more than retirement. For some, we are planning for education savings, life insurance, estate planning, tax planning or any other number of things based on your personal situation. In this plan, we are bringing all those areas together as your roadmap.
Just like a road trip you take with a map, there will likely be unexpected detours or slowdowns along the way. I was on a trip last year where the interstate was closed and we were detoured onto an adjacent road through some small towns in central Ohio. There was a long period of time where traffic was literally at a standstill and people were out of their cars walking around.
We didn’t plan for or expect this detour and delay, but we made the best of it. We turned off the car and the noise of the radio and sat with the windows down. It was a mild fall day and as we sat on that two-lane winding road we could hear and see the small stream running alongside the road and hear the wind rustling through the leaves. We looked at the bigger picture, the longer term and we knew, although we had a slowdown, that this was still the best route and we would still get where we were going.
Could we have done anything to avoid being caught in that mess? We could have left home earlier so that when the accident happened we were already in front of it. But how would we have had the foresight to know that? We couldn’t. It’s easy to sit in the traffic and tell yourselves you should have left earlier. Hindsight is 20/20, as they say. We could have taken another route. But any other route would have taken longer and been a more difficult drive.
When we prepare a financial plan, we plan for detours and delays along the way. We don’t know exactly when they will happen or how severe they will be, but we do bake them into our clients’ plans. Some things we know – the S&P 500 has declined by 5% or more 182 times from 1948 to the end of 2017. That’s an average of once every 4.5 months. It’s declined by 10% or more once every 1.3 years on average and by 20% or more every 6.3 years on average. (Source: American Funds) So, we know that market pullbacks are normal. Historically, they’ve happened many, many times. What we don’t know is when they will happen. That’s okay.
Prepare your expectations
Since we know that market downturns are normal, then we should expect them. Here’s something else we know. Your behavior with your investments around these declines is more important than the market decline. It’s so important that one of our primary tasks as your advisor is to help you behave well with your investments. A lot of times that means telling you to do things that seem counterintuitive – like doing nothing. Human nature makes us feel like we ought to be doing something – “adjusting” things, moving money around. The truth is that we should ignore these feelings. They are detrimental to your long-term financial plan.
What would an “adjustment” look like? Most would say move more into bonds so as not to subject that money to the movements of the market. When do you move it? Now? And then when do you move it back from bonds to stocks? How will you know when is a good time to put money back into stocks? You won’t know. I don’t know either. We always tell clients that we will not play guessing games with their life savings. I don’t know if this downturn is the start of a longer-term downturn or if it’s a blip that will be over today or in a few days or a week from now. I do know the only way to be absolutely sure of capturing the entirety of stock’s long-term returns is to be willing to absorb every day of their temporary declines.
So, if we don’t succumb to our human nature and “adjust” things, what do we do? Sit idly by and watch account values decline? Yes. Or better yet, don’t watch. You turn off the noise of the television, radio, internet or whoever is blaring scary headlines at you and you sit, like I did in that traffic jam, and make the best of it. It’s not fun to sit through, but you look at the bigger picture, the longer term, and you know, although you had a slowdown, that this is still the best route and you will still get where you are going.
Our experience has been that our clients know these things. When we do have clients contact us it’s usually to say that they just needed to hear us tell them that they don’t need to be reacting. Whatever you need, don’t hesitate to call us. We’re always here. We also encourage you to follow us on social media, where you can keep up-to-date on what we’re saying about markets, investing, financial planning and other topics. Links are below. We’d love to connect with you.