That Queasy Feeling in Turbulence
Recent Market Drops Can Raise Tension Like a Bad Flight
As an investment advisor, when we see a significant market drop, it sometimes warrants a response for investors. You've seen the news headlines, and know well what's driving the recent volatility. Currently, it's the coronavirus.
It was less than 6 months ago that many were predicting a bear market, due to trade wars with China. Most would agree that the rumors of the markets demise were overrated. I can't predict the future, but I do know that the market will go up, and it will go down. I also know that the news media is going to capitalize on any event, today and in the future and it will cause fluctuations.
Some people handle these ups and downs better than others. If I can make a comparison at my husband's expense, it's like flying. Some handle it calmly, while others are terrified of the experience. My husband is among the latter.
He doesn’t like flying. He sure likes getting to wherever we’re going, but he absolutely has no stomach for the ride. Every time there’s the slightest bit of turbulence, his face turns ghostly pale, he does a death grip on the arm rest and has this look of pure terror on his face.
If the other passengers were to judge the outcome of the flight by his mannerisms, it would look like a scene from the movie Airplane. This is a normal occurrence most flights, but we land safely, he exhales and we have a great time.
He loves the outcome of flying, and he really should just relax. I’d give the same advice to my financial clients. When I do an investment plan, we know ahead of time that there will be turbulence. It doesn’t matter that the ride might get a little bumpy, as long as you arrive where you’ve planned.
I certainly wouldn’t recommend overreacting or trying to bail out. Some do. In my last flight, we witnessed the most erratic flight behavior I’ve ever seen. It struck me that it’s the same mindset that leads many to actually put their investments at risk when they are emotionally charged with fear.
While my husband is uneasy while flying, he isn’t completely irrational in his actions. He remains in his seat. Good idea, right? Well, you can imagine my surprise, on our last flight when a panicked passenger did quite the opposite!
Everyone knows that during take-off, you MUST remain seated. And this was the exact moment that a middle-aged man RAN to the front of the plane! Just as the wheels were taking off, he disappeared into the unlit front portion of the cabin, right by the pilot’s door and was intercepted by a very concerned flight attendant! Let me say, more than just my husband was concerned at this point! Was there a crazy person on board? What was going on? It was dark upfront, so we couldn’t see, but we knew the flight attendant was talking in a tone that was demanding. “SIT DOWN!”, we all heard…
I know unusual things happen on planes, just like they do in markets. We know that trade wars with China have added volatility, lately. There will always be new headlines, and any of them could mean turbulence for Wall Street.
As an investor and retirement saver, how much will this turmoil matter to you in the long run? Not as much as you may expect. There are many good reasons to remain in the market rather than attempting to intuit or guess when and where big shifts in fortune may arrive.
What is market timing? Michael Tanney, one of the directors at Magnus Financial Group, puts it plainly: “Market timing doesn't work […] Every bear market has historically given way to a bull market […] No one can predict the timing of these moments.” Market timing is the use of predictive tools and techniques to predict how the market may move and make investments accordingly.1,2
When I work with my clients and we build a financial strategy, the need to factor in market timing diminishes. They have a strategy that is based on their risk tolerance, goals and time horizon. This balanced approach means there isn’t a need to feel nervous when volatility arises.
There may well be a situation in which an adjustment to strategy is recommended, but it’s also possible reacting rashly may have negative consequences. The market reacts to headlines, but it’s just as common that quick drops might see fast relief.
Remember that many investors come to regret emotional decisions. The average recovery time for bear markets with a 20-40% drop is only about 15 months (measuring each recovery since 1945). For declines of 5-10%, it’s taken an average of a month to recover. That’s why our planning is always for the long-term, with strategic adjustments that are designed to ride through turbulence.3,4
Things often work out just fine. In fact, the very day I recorded my client market update video, in August of 2019, the markets reversed for the day before it even got to my clients! It ended up just as well for the erratic passenger on the flight. He, and all of us, benefited from a patient and kind flight attendant. Just at the point we thought she might be forced to wrestle with him, she somehow calmed him down and got him to sit beside her for the ascent. We heard her assure him a few times that although he MUST stay seated now, he could get up in a few minutes.
After we were cleared to move about the cabin, it was obvious what the issue was. He desperately needed the restroom, due to queasiness created from the stress of flying.
I realize that when it comes to retirement accounts, investing can be stressful just like flying. When it becomes overwhelming, it’s important to look at the outcome and have someone there for you when the ride gets bumpy. Like the flight attendant, I can be the voice of reason to help ride the turbulence of the market on the way to your goals.
But it's critical, now more than ever, to have a plan that is in alignment with your risk tolerance! It's possible that unsettling feeling is a warning that your portfolio isn't adjusted properly, leaving you at risk! C
Related Reading: does-sequence-of-returns-math-upend-timing-the-market/
1 – money.usnews.com/investing/stock-market-news/articles/2019-05-10/how-investors-can-mark-the-markets-seasons [5/10/18]
2 – investopedia.com/terms/m/markettiming.asp [4/10/19]
3 – marketwatch.com/story/why-retirees-shouldnt-fear-a-bear-market-2019-01-16 [1/29/19]