In the next couple of weeks, investors will begin receiving October portfolio statements from their custodians and may ask themselves what to do when markets drop. If you’re like most investors, you usually don’t take the time to check your account balances daily, online or through your mobile app, but rather only decide to look when you hear bleak headlines on the nightly news. And with recent headlines such as these, we can understand why:
“Stock market experts say this is a stumble, not a plunge”
“U.S. stocks close lower as Dow drops nearly 1,400 points in 2 days”
“Market timers say it’s still too early to jump back into stocks”
“Dow drops more than 1000 points in two days”
Here’s what to do when markets drop:
- Understand that articles are written to trigger an emotional response.
- Be rational and proactive, not emotional and reactive.
- Address “1,000+ point drops” long before they happen.
- Either hire an Investment Advisor with a Fiduciary Duty or have a battle buddy.
Journalists have a unique job; they pen headlines that are designed to invoke an emotional response to get readers to click on the article. And when markets drop, the headlines get more wild. More clicks = more traffic = more ad revenue. Let’s illustrate this point with two headlines. Which is more exciting?
“Dow Drops 1,000 points.”
“Dow closes down 3.7%.”
We’re willing to bet the “1,000 point” headline is more exciting for the mere psychological idea that 1,000 is larger than 3.7. But if the Dow is sitting at 27,000, these hypothetical headlines depict the same results, just written differently. While our example above is purely hypothetical, a seasoned investor needs to know when to dig deeper than flashy headlines.
The third principle of Our Investment Philosophy reads:
Emotions are Destructive. Reacting to current market conditions may lead one to making poor investment decisions at the worst times.
Market corrections and other major news events affecting the world tend to alter investor’s outlook about the future when markets drop. When you hear advisors suggesting you take a long-term approach, the advice can feel too cliché and ambiguous. We believe this advice is more about historical evidence and emotional pause rather than an effort to brush off the pain you may be feeling. When an investor is proactive, it means she has positioned her portfolio in a manner paralleled with market uncertainty. Recognize that markets rise and fall as they digest information daily. These movements are a fundamental part of being an investor and should be embraced rather than avoided. It is our opinion that one of the best ways to accomplish this is by having a globally diversified portfolio that pursues your financial goals and is based on your tolerance and capacity for risk. This means that rarely will you be 100% stocks, 100% cash, or 100% bonds. You’ll more than likely be a combination of each through all market conditions. How much of each is outside the purview of this blog post, but we’d love to sit down with you and build a portfolio just for you.
A principle of portfolio design is understanding the long-term characteristics and historical performance of a similar portfolio. While history may not be indicative of future results, it provides some insight into how one’s portfolio may have performed in past markets as well as the variability of returns over time. With this information and an understanding of your financial goals, it’s relatively easy to address 1,000+ point drops long before they happen. Often, the question isn’t about whether these drops in markets will occur, but rather, how much of the drop your portfolio will feel and what your reaction may be in those moments. Will you decided to sell everything and go to cash, will you double-down and buy more, or will you do nothing? We believe utilizing an intuitive risk tolerance assessment is a great starting point towards designing a personalized portfolio that is customized to you and your feelings.
As you plan for your family’s financial future, it can feel daunting to go at it alone. An easy way to address this is by having a trusted friend or partner who you can freely talk to about these personal issues, one you can rely on for accountability when markets drop, and one who goes through the same process as you. In the military, this person is often called a “battle buddy.” If you’re a DIY investor, do you have someone like this that you can rely on?
If not, another way is to hire someone to fulfill this role. An investment advisor with a Fiduciary Duty can not only help you structure your investments for market uncertainty, but also keep you invested when markets drop. It’s easy to hire any financial advisor to implement an investment strategy, but we find that non-investment related issues have a meaningful impact on an investor’s behavior. For these reasons, we believe working with a Fiduciary is the most prudent way to approach your relationship with financial advisors. And that’s precisely why we choose to be Fiduciaries. We’d love nothing more than earning the chance to meet you and learn how we can help make sudden market movements have a more meaningful impact in your life. Here’s how you can get in touch with us.