How to Handle Market Downturns: Horror Show or Part of the Journey?

How to Handle Market Downturns: Horror Show or Part of the Journey?

To begin, we want to address the somber news that lives are being affected by coronavirus. Our thoughts go out to the people infected and their families. We also wish to thank the medical professionals who help during this outbreak.

As a financial planning firm, we hope to provide our thoughts on the recent market volatility. The rest of this article focuses on how to handle your investment portfolio — especially in these up-and-down markets.

Stock market volatility — aka its ups and downs — is back. You have two choices on how you can view periods of overall financial market losses:

First Viewpoint: You can visualize this stock market volatility as a villain, like those in these two examples:

In Poltergeist, the little girl warns, “They’re here!” “Who?” you may ask, well … stock market losses! AHHHHHH!!!

In The Shining, Jack Nicholson breaks through a locked bathroom door with his axe and then sticks his head in the hole sneering, “Here’s … Volatility!”

Second Viewpoint: See your investments as a journey, like going down a mountain river.

You contributed to your investments at the top of the mountain (aka snowfall), and now your money is traveling toward your retirement years. There may be times when you experience some rapids, but you have faith that this journey will lead toward calmer and bigger waterways. 

Yet our human brains are programmed for us to remember the rapids instead of the gentle stretches.

For example, people are quick to remember 2008’s market performance. Can you easily explain the themes of every year between 2009 and 2017? Each of these years saw a positive year for the S&P 500 index, yet people always talk about 2008.

Volatile years with stock market losses are nothing out of the ordinary. Historically speaking, the last few years have been rare because we haven’t seen much volatility. This mellow stretch in the markets led to some investors getting overconfident that the market always goes up.

Franklin Templeton Investments has a fascinating chart showing annual total US stock market returns compared to the largest loss of the same year. 2017 and 1995 proved to be tied for least volatile year in the last 30 years.

Know Your Brain: Loss Aversion

Psychologist Danny Kahneman won a Nobel Prize for his work in economics alongside his fallen comrade Amos Tversky. They conducted many studies, and Kahneman shared their findings in his book, “Thinking Fast and Slow.” One of their studies focused on Loss Aversion. They wrote, “when participants in an experiment were instructed to ‘think like a [stock] trader,’ they became less loss averse and their emotional reaction to losses (measured by physiological index of emotional arousal) was sharply reduced.”

Burton Malkiel explained it concisely in “A Random Walk Down Wall Street: The Time Tested Strategy for Successful Investing.” He said “Kahneman and Tversky concluded that losses were 2½ times as undesirable as equivalent gains were desirable. In other words, a dollar loss is 2½ times as painful as a dollar gain is pleasurable.”

Just like many behavioral finance biases, the first step to combat this trap is to be aware of the potential pitfall. No one likes to see their account values go down. Remember to think how Loss Aversion may be influencing your investment behavior.

Long-Term Investing Inspired by Jack Bogle

Our brains are hard-wired to notice risks. Our fear of the unknown can program us to fight, fly, or freeze. Instead of defaulting to one of these survival instincts, think of the book title by Jack Bogle. Bogle, the founder of Vanguard and of index funds, titled one of his books “Stay the Course.” 

Remember, the dollar value of your account is just a number on your computer screen. You haven’t lost any money until the day you turn that number into actual dollars when you withdraw the money. 

My friendly challenge to you is to reflect on your overall investment goals, your time horizon, and the consequences you’d experience if you withdrew sooner than you anticipated. To nudge you to reframe your thinking, since the market isn’t at all-time highs as of writing, it may be a good time to buy and contribute to your investments since you’ll be able to purchase more shares at lower prices.

If this money in your investment account is earmarked as your “grey-haired money,” or funds you’ve set aside specifically for your comfortable future, then what would your “grey-haired self” want you to do in your situation? Think critically and make informed decisions before letting your emotions make hasty decisions during unnerving times. 

Do you think your journey ahead will mostly be in rapids or on a steady river stream? You can’t control the markets, but you can control how you invest. 

And to reference another horror movie: Just like in Birdbox, you can always put your blindfold on during the rapids and not obsess over checking your account value on a daily basis.

Want to Revisit Your Plan?

When you work with a financial planner, you can determine goals for your investment account, your time horizon, and your risk tolerance before starting your investment journey. If you wish to revisit your plan, get in touch with your planner! 

Don’t work with a planner yet but still want to understand how to invest — or whether your current investments match your appetite for risk? Take your personalized investment survey here:

After you complete the survey, feel free to schedule a complimentary initial consultation to review your results, go over any big-picture topics you may want to discuss, and see if we might be the right fit for your financial planning needs. 

A Tribute to Jack Bogle: Jack Bogle passed away last year. He fought for the average investor when he created low-cost investment options by following indexes instead of paying investment managers’ fees to try and beat the markets. Warren Buffett praised Bogle saying, “Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.

Bogle’s index investing philosophy converted me a long time ago. You can read about it in this previous article: Passive vs. Active Investing: Keeping Your Costs Low.

To finish, I’ll share two of my favorite Jack Bogle quotes, which are fitting for this article’s theme:

“Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”

“Time is your friend. Impulse is your enemy.”

If you have questions about how to handle market volatility, feel free to try the chat feature at the lower-left corner of this page.

Want to learn more about planning your financial future? You can visit our How It Works page for information, then simply schedule your no-cost initial financial planning consultation.

Further Reading Resources

Photo by Phil Houston on Unsplash

Dan Andrews
Dan Andrews
dan@fpfoco.com

Dan Andrews is a CERTIFIED FINANCIAL PLANNER™ professional and the Director of Estate and Financial Planning at Financial Planning Fort Collins. With unique experience working with members of generations X and Y, he has served clients of all ages and backgrounds since 2012. Dan enjoys a light-hearted approach toward Financial Planning to make the process more fun for clients. He enjoys giving back to the profession and the community. Dan has served as the Vice President of the XY Planning Network Diversity Committee and as the Public Relations Director for the Financial Planning Association of Colorado. To learn more, read Dan's blogs or the articles he’s been featured in.