Imagine yourself at the apex of a rollercoaster. You can see almost everything from here. Life is grand.
Sure, you know the coaster is about to drop down an unspeakable plunge at some point, but for now, you’re on top of the world.
Then it happens. You suddenly free-fall down and for a moment have the irrational thought that the coaster might come off the tracks. You get scared and start thinking things like:
- I know this is a rollercoaster, but is it really supposed to be this scary?
- What if this thing fails? After all, I know people who have lost their lives on these things!
- I can’t see the end of the tracks – there’s a foggy tunnel ahead. When will it go back up?
You want off. But this coaster is one you’ll have to ride out – you’re locked into place. Besides, if you bail now, you’d probably die.
The stock market is similar rollercoasters. It goes up and down and you might literally or figuratively lose your lunch from time to time. But there’s a key difference with the stock market: you can get off the ride whenever you want to, and that’s not necessarily the best thing for your money.
The Recent Stock Market Drop
The S&P 500 Index, a frequently used market benchmark, dropped 11.17% from August 17th, 2015 to August 25th, 2015. Ouch. That’s scary.
But there’s good news: it recovered over half of its value since August 25th, 2015. The rollercoaster is going back up. Granted, more recovery is still needed, but things are looking up.
What does this teach us? Imagine being scared out of your mind on August 25th, 2015 and thinking that the stock market was going to go lower. So, you decide to sell your investments. Then the market starts to go back up. You get excited, and eventually decide to buy again. See what happened? You sold low and bought high: a bad idea!
How to Keep Calm During a Stock Market Drop
Financial advisors like myself have to reassure people that the stock market has followed this up-and-down pattern for the life of the market. It’s a rollercoaster, so you should expect some dips and drops.
The best way to keep calm during a stock market drop is to understand the history of the stock market. Knowing that these drops will occur, reason can kick in and give you the wisdom to hold onto your funds – not sell them at a low point.
Money tugs on one’s emotions, so it’s understandable to have some “freakout moments” when the market looks grim. As long as the investor doesn’t act on those emotions, their investments are likely to be just fine in the long run.
It is the duty of a financial advisor to proactively reach out to their clients to calm their nerves when their investments plummet in value. And that is exactly what we did at Strategic Income Group when our clients experienced this most recent drop. Our clients deserve to be reassured – and our assurance is based on experience.
Many people call us and say “sell everything.” We honor their requests, but we also tell them what we think because it’s our fiduciary responsibility. If a client’s portfolio is designed for retirement, and a client is several decades away from that, should they really be worried about the daily movements of the market? Of course not.
That’s why we help our clients create what we call a “Family Investment Policy Statement” in Phase II: The Accumulating Wealth Phase of the Three Phases of Wealth. This statement allows our clients to confirm their goals for their accounts including their time horizon. This gives our clients something to look at when thinking about their accounts and encourages them to press on should they experience a market drop well before the time they intend to use the money.
Bottom line? Have a protocol in place before drops happen, remember that corrections happen, and think long-term.