Earlier this year, as markets dealt with near 1,000 point drops on two occasions, the financial media was fond of topics themed, “Investing Near A Peak” or something very similar. Today, the market has remained in a range hovering near the 26,616 top on the Dow Jones Industrial Average (DJIA). Ten years ago, almost to the month, this same index was roughly 7,000. I’d say it’s been a nice run.
The equity market’s slow melt-up since the 2016 Presidential election has been one of many surges during this bull market. At the very least, if one is suffering from Financial Acrophobia (FA), a fear of financial heights, they should be thanking their lucky stars that markets have gotten high enough to make such a fear worth discussing.
With the return of volatility, these FAs are clamoring, “It can’t keep going up this fast,” and to this point, they are likely correct. They say, “We must be getting even closer to a correction.” Right again. Just as when we drive from Denver to San Francisco, each mountain brings us closer to the next.
At this point, most FAs are adamant: “WE HAVE TO DO SOMETHING!” To them, this means, if still invested in the stock market, it’s time to take money out of the market, wait for the inevitable correction and then start investing again. But this is the “siren song” that lures FAs to make The Big Mistake…the one they may regret years and even decades from now.
That there is a correction coming is inarguable. It’s part of a normal market cycle. That fact leads us to remind clients and others of Three Great Truths that SRQ Wealth contends are incontrovertible, which thus drive our decision making:
- We cannot say when or at what level a market correction will begin.
- We cannot say when or at what level a market correction will end.
- We know that however deep or shallow the correction is, it will be temporary.
And when it’s over, the permanent uptrend of the markets will reassert itself and the opportunity costs of being out of the markets will start piling up. In the meantime, the accumulating investor and retired investors with a sound income plan (i.e. those that don’t need to get out of the market to cover their cash flow needs), will view these temporary lower prices as a buying opportunity. Reminded of these Three Great Truths, savvy investors will stick to their investment plan (which was built taking these corrections into account), and refrain from making The Big Mistake.
For those that doubt the Three Great Truths, consider the following:
Sample Scenario #1
The DJIA is at 25,000 and the Financial Acrophobiac (FA) gets out of the market.
The DJIA staggers up to 27,000 then drops 15%.
How much is the FA ahead?
They are ahead, or have avoided, an 8% loss, but only if they got back into the market exactly at the bottom of that 15% drop.
Sample Scenario #2
FA - “What if the correction gets deeper, goes down further?”
SRQ Wealth - “What if the correction starts later and drops less?”
Let’s say the FA again gets out of the market when the DJIA is at 25,000.
Then the DJIA rises to 28,000 then drops 10%.
How much is the FA ahead?
Answer: they aren’t ahead. The market dropped from 28,000 to 25,200. The FA would have missed out on earning 200 more points, but only if they got back into the market exactly at the bottom of that 10% drop.
None of this takes into consideration the realization of capital gains taxes, transaction costs, and the mental energy it takes to jump through these hoops. That reminds me of a famous quote from the legendary investor, Peter Lynch…
“Far more money has been lost trying to avoid corrections
than has been lost in the corrections themselves.”
In my 20 years of advising people about investing, I have found that saying, “Don’t get out, just stay in,” often goes in one ear and out the other. While that may have been the right advice in most cases, it’s difficult to for some to internalize this emotionally and have confidence that they will still be okay.
I find that when I give that same advice, but with a story (a real-life example that clients can visualize), the advice makes perfect sense. The story I share with FAs highlights the foreboding reality that, to avoid a market correction, you have to be right…twice. And you won’t be. No one ever is consistently.
Then there is the emotional side of fear. Whether it is just the usual fear of heights or Financial Acrophobia, the probability of actually falling is small. Just telling a person with this fear, “Don’t be afraid,” often only makes them more afraid. That’s when having a plan can be a great comfort.
Failing to plan is akin to planning to fail. Don’t make The Big Mistake. Plan for a correction. It’s coming. But until then, let’s be grateful that markets are at heights that no one thought was possible just a few short years ago.
Financial Acrophobiacs must unite…unite with a Certified Financial Planner® practitioner that not only has the training and experience, but also the competence and patience to help guide them from peak to valley to peak again.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.