In many ways, the experience we have while eating those complimentary pretzels is similar to the one we have as investors. We invest our financial assets, work with a trusted financial professional to help grow our portfolios, and hopefully reach our financial goals.
Unfortunately, you don’t have to wait in a crowded security line at the airport before you experience turbulence. When things begin to head south, some investors may chose to reach for the sick bag and sell their stocks.
Those who flee the market may fear a correction—a term for when the market drops 10% or more. They may believe that decline could lead to a bear market. The reason doesn’t matter as much as the consequence of their actions. They unbuckled the seat belt around their investments and made a run for the exit.
Highs and Lows
Investing in equities has always required riding out the ups and downs. The same goes for turbulence—it’s a normal part of air travel that travelers know they may encounter. And unless it’s severe, you may not feel it. The 24-hour cable news cycle repeatedly declares heightened volatility to be the “new reality.”
In reality, the market has experienced intra-year dips annually for decades now, even in the years that it showed positive year-end returns. Volatility happens more frequently than many realize.
Over the past 20 years, the S&P 500 Index1 has shown declines every year (FIGURE 1). In most, it recovered and ended in positive territory. In others, it didn’t rebound. But each year there was at least some point at which equities were down.
This seemingly unpredictable market cycle of gains and losses has investors asking, “How can we prepare for what comes next week, next month, or next year?” Plain and simple: develop a solid financial plan, stick with it, and resist the urge to panic.
