The stock market is incredibly complex. Hundreds, if not thousands of factors work together to push prices up and down every single day. In 2020, 55% of adults in the US invested in the stock market, so you could really say there are millions of individual factors at play.
When the stock market is good for a while and prices go up, your profits increase. Then, interest rates are held low, and your profits increase even further. It’s easy to believe the market will keep going up, up, up.
But as soon as the market drops, we can begin to feel antsy about our investments. The market generally climbs slowly, but it sure drops rapidly. Faster than most of us can respond.
Risk-aversion and recency bias
Recency bias refers to how we naturally expect things to go how they’ve been going lately. And risk-aversion means people are more upset when they lose money than they are excited to gain the same amount of money. We like winning, but we despise losing.
These two tendencies work together to create the perfect storm. While things are good (as they are now), most of us are blissfully unaware. Yet, when the market drops, we feel like the sky is falling. It’s never been worse than it is right now, we think. We’re never going to recover from these losses, we worry.
With recency bias and dramatic headlines at play, when stock market prices do fall, you’ll probably hear people talking about how it’s the sharpest drop our generation has seen, or that more money has been lost in that particular downturn than ever before. It will seem like a market dip is totally new. Even like things are “different” this time.
But in reality, every market drop is normal and expected. The exact details and timing may be new, but the activity and behavior is the same. It happened in 2020 when COVID-19 hit. It happened in 2008-2009, during the financial crisis, and in the early 2000s, when the internet imploded, and so on. The dressing is new but these dips really are normal and should be expected. We’ve completely recovered every single time, and then some.
Acknowledge your emotion, but trust your plan
It’s natural to feel uneasy when you see your statement or log into your portfolio portal during a drop. But I encourage you to remember the financial plan you have in place. We helped you put together this personalized plan, fully knowing a market drop can – and likely will – happen during the lifetime of your investments on more than one occasion. Fluctuation is normal.
What should investors do when the market inevitably fluctuates?
The number one advice I can give you is to stick with your original plan. Avoid the strong temptation to sell your investments, and give up on your financial goals and retirement dreams.
Every individual is different and your specific situation really determines how a market change impacts your financial plan. That notwithstanding, for most, your best bet at recovering from losses is: the new plan is the old plan. Why?
The certainty of fluctuation is built into your financial plan. If your portfolio allocation deviates from what we have mutually agreed upon in advance, we’ll look at adjusting your plan. So, unless the market drops below your tolerances, you can sit back and wait out the storm. If the market doesn’t hit that point, we know you’ll still have some uneasiness. But remember, we’ve been planning for this. We knew it would come, and the plan is still working. The market will recover over time.
Also, even the sharpest investment brains in the world can’t guess when the market will go up and down. If you attempt to time the market during a drop, you’re basically guaranteeing yourself that you will lose. To time the perfect sell point and the perfect repurchase point is impossible. But what isn’t impossible – and is in fact quite common – is to stay in your investments, wait until the market rises again, and cash in on your increased value in the future.
Final thoughts on market ups and downs
At Cook Wealth, our first question isn’t “What are the markets doing?”. It’s “What does it mean for you, and how are you doing through all this?”.
Our main focus is to build a portfolio and a long-term financial plan that keeps your lifestyle, goals, and needs as the top priority. Put simply, we build portfolios based on what’s happening in your life, not what’s happening in the markets.
The thoughts I’ve shared here are general advice we give in general situations, but every single individual is different. In a market drop, we’ll take into consideration your specific set of circumstances, goals, and retirement timeframe. We truly care about you and your family. We’ll always do everything we can to make sure your portfolio empowers you to have the life you planned for, no matter what the market throws at you.
The markets go up, and they go down, but they mostly go up! So for now, with a great plan, and a strong market, let the good times roll!
Got questions about your financial plan? Give us a call today.