The phones were quiet.
On February 5, 2018 the Dow dropped 1175 points. It was the worst single-day point drop in history.
And still the phones were quiet.
The media did what it does best: speculate and incite panic. What caused this catastrophe? Fear of rising inflation? The FBI probe? Fed policy? Malfunctioning trading algorithms? Unwinding of inverse VIX speculation?
Would it get worse? Who is to blame? What can you do to protect your investments?
Seriously the phones didn’t ring once. Not even an email.
To a financial planner silence is golden, especially during market turmoil. It indicates our clients have listened, and understand not only basic tenants of investing, but are confident in their current plan. This doesn’t happen by accident. It takes time, education and a whole lot of reminding.
“The stock market is a device for transferring money from the impatient to the patient” – Warren Buffet
By percentage the Dow was down 4.6%. That’s a great headline, but does it matter? Looking backward, 107 other days have been worse. How many of those do you honestly remember?
The Dow dropped 1175 points. Did you know that’s what the entire index was worth in 1984? Long-term investors have been consistently rewarded for ignoring bad days.
Volatility happens. Markets go up and down. Investors seeking growth must accept risk. You don’t have to be an investor; there are alternatives. Want certainty? Buy a CD. But if you want real inflation-fighting return, the market is better.
It’s not a smooth ride. Historically, the market drops by 2% or more up to 5x per year. Corrections of 10% or more happen annually. Crashes, when we lose more than 20%, happen 2x per decade. That’s a lot of chop. But over the long term, markets tend to rise.
Here’s the evidence: over the last 100 years, the S&P 500 has finished 53% of its days with a gain. The statistics only get better as you widen the scope. The market has been positive in 58% of its months, 63% of its quarters, 72% of its years, 76% of its five-year rolling periods, 88% of its ten-year rolling periods and – get this – 100% of its twenty-year rolling periods. The one surefire way of skewing the odds out of your favor is to let emotion dictate your decisions. Selling low never works.
Question: How do you achieve confidence?
How do you take all this information and turn it into confidence, the only emotional state capable of fearlessly navigating ups and downs?
At Arcadia Financial Group, we start with worst case scenario. Most clients are retired or will be within 10 years. We simulate catastrophe – what would happen if your portfolio were immediately clobbered with two market crashes within a short span of time – like what happened between 2000 and 2008. We hypothetically observe how your nest egg, and by extension your retirement income, would be affected.
If you’re not adequately protected, we make the appropriate changes. Simple. Everyone’s results will be different depending on the amount saved, age, tax liability, lifestyle, life expectancy and more. Some people can afford to have a lot in the market. Others will need to focus more on downside-protection. Most will require a combination.
With technology, we take emotion entirely out of the equation. The best planning software will tell you the exact rate of return your portfolio requires to cover your retirement income over time. We can then design a plan that aims to achieve that return with as little risk as possible.
Next, we constantly remind people of the goal. Most people, and their advisors, focus on achieving maximum return for a given amount of risk. That’s the wrong approach, and a poor benchmark, because in the real-world growth doesn’t pay the bills. It’s income that determines retirement success. Being sure that you can achieve that income, regardless of the current market environment, is what enables the resolve required to navigate volatile markets.
Answer: Hope for the best, but plan for the worst.
If you plan for your financial future with this as your guiding principle, confidence is possible. Inevitably, there will be times when your resolve is tested. But a good financial planner, one who has helped you plan for the worst, can then confidently remind you to turn your attention elsewhere – how about grabbing a cheeseburger? They’re delicious.
Seriously, pursue the distraction of your choice, but turn off the news and resist the urge to check your account balances. When you’ve planned prudently you can afford patience, and in doing so, put time squarely on your side. It’s the only way to win.