Recently, my firm participated in an investor client experience survey polling nearly 19,000 investors served by 449 advisory firms worldwide. There were lots of findings to digest, but I’d like to explore this one today: Worldwide, among respondents’ biggest financial fears was experiencing a significant investment loss in a market downturn. It ranked second only to not having enough to retire on.
That’s understandable. Market downturns are frightening. They can seriously deplete your assets and may cause you to adjust your financial goals.
What constitutes a “market downturn” is totally subjective and personal. Some investors might be concerned with a 5% drop, whereas others might not blink an eye at a 25% decline. The term “bear market” gets thrown around a lot to describe market downturns. While the most commonly accepted definition of a “bear” is a 20% decline from peak to trough, a 19.9% decline would likely be just as painful, even if it didn’t technically qualify.
One way to stay upbeat when the markets head south is by remembering what we already know about periodic downturns.
- They’re inevitable. Based on 90 years of historical U.S. data, 10% market downturns have occurred slightly more than annually; 20% market downturns have occurred about every 3 years. While there isn’t nearly as much historical data, the results from Canada, international and emerging markets have been similar.
- They’re unpredictable. Given how markets operate, we can’t predict when they’ll come … or when they’ll go.
- They’re unavoidable. Once a market downturn is underway, about the worst thing you can do is try to “escape” it, because …
- They’re highly likely survivable. After every market pullback to date, markets have not only recovered, but have ultimately continued to advance to new highs.
Since we can’t avoid market pullbacks, we must PREPARE for them.
It would be wonderful to be able to “do something” to avoid market downturns instead of having to tough them out. Unfortunately, there’s ample evidence that you’re unlikely to benefit from the attempt. You’re far more likely to lock in unnecessary losses, miss out on unpredictable recoveries and incur added trading costs.
PREPARATION means creating a long-range plan and sticking with it.
As I covered in this post on market corrections: “We believe the best course of action is to be guided by your personal financial goals rather than near-term market volatility; this almost always means staying the course during the downturns.”
PREPARATION does NOT mean pulling out when you fear a significant market downturn is imminent.
It’s one thing to carefully restructure your portfolio because your goals have changed. It’s another thing to react to market whims. Fund manager Peter Lynch nailed it when he observed:
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
I probably can’t eliminate the fear you’ll feel the next time the market is sinking, but I hope this at least helps you overcome it. If that’s not working either, please contact me.