The markets have gone straight down for almost two weeks. The media is becoming more and more pessimistic as the averages plummet. Doom and gloom permeates the investor population. This usually means that opportunity is just around the corner.
In my own world, the telephone has been ringing off the hook and my inbox is full of panicky emails. So this column is for all those clients, readers and prospective clients out there who are wondering what the heck is going on.
First you must take a look at the emotions you are feeling. Fear, anxiety, even panic are just some of the emotions I have identified in my communications with investors. Most of you reading this column, however, have experienced far worse declines than this through the last few years. Remember the 20% decline in 2011? How about the 16% decline in 2010?
If those pullbacks seem hazy to you or if you have forgotten them already, then that should be a lesson to you in how fleeting these market corrections can be. Sure, while they are occurring, the paper losses can be painful, but remember they are not real losses unless you sell them.
It is hard to ignore the headlines though. The Wall Street Journal (among others) leads with this front page headline today “Stocks take Beating as Alarm Grows.” Makes you want to sell everything, right? Ask yourself this question: if that headline read “your house is taking a beating as alarm grows” would you sell? Of course not, you say, my house is a long-term investment.
Well isn’t your retirement account also a long-term investment? If your time horizon is three, five, ten or even 20 years from now, why would you want to sell now? Of course, if you thought the bull market was over and that we were heading into a multi-year decline in the stock market that would make sense. But where is the evidence that a scenario like that is facing us?
“But the stock market was flat last year,” argued one investor. “What makes you think this year will be any better?”
Well, since 1970 there have been six “flat” years for the S&P 500 (-2% to 2%) and following those years, the index returned between 11-34%. In which case, this year should end with a positive gain, even though it has started out badly.
If one looks at pessimism in today’s market, it is clear that the gloom is positively dripping off the walls. John Templeton once said that “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Is anyone out there felling euphoric right now?
Some scientists say that human beings are really not wired for stock market investing. They say your brain is wired best to respond to short-term stimuli, especially when your brain perceives danger of any kind. Therefore, your natural reaction to a market plunge is to flee to the sidelines. Recognize that and fight against it. Investing requires a multi-faceted, long-term approach. Unfortunately, the brain is weakest in discerning long-term patterns or focusing on many patterns at once.
My advice is don’t fall prey to the herd instinct. The markets may go lower from here before cooler heads prevail. But they will prevail. Just believe as I do, that this too shall pass.