For most of the last 9 years, the market has been going in one direction– up. The headlines that have accompanied the last 12 months of growth include “Consumer Confidence Hits Highest Levels Since 2000”, “Unemployment Rate Falls to 16-Year Low” and finally, a rather unusual headline “Global stocks post strongest first half in years, worrying investors.”
A strong market causing worry? While that might be counterintuitive, it does seem to reflect the changing attitudes we’ve observed as of late. Elation is morphing into angst. As enjoyable as it is to watch the Dow surpass record after record, now reaching more than 4 times its Great Recession low, it’s tough to ignore that we’re historically overdue for a correction. Even though it seems like nothing will rattle this seemingly unflappable market, we want to know – when are the good times going to end?
It’s understandable that we want certainty. I’m no fan of surprises myself, and I must admit I’ve been thinking more about market drops lately than usual (especially the last couple days). As much as we might want to know what’s going to happen with the market, the only thing we can really be sure of is that a correction is coming at some point. When? Well, that’s an interesting question for the speculators, the pundits and the journalists but not a very valuable one to you and I as investors.
Unless you believe in market timing, which is trading based on a perceived ability to predict markets thereby giving you an edge over your mortal counterparts, there is little advantage to knowing when the market is set for a drop. If you believe as we do, that you’re much better off staying in the market despite the ups and downs, you might as well turn your crystal ball into a yard globe for all the good it will do you. The unanswerable question “When will the market drop?” is not what we need to be asking. What we should be asking ourselves is “How will I prepare for the next market drop?” The former is something we can’t control; the latter is something we can.
Being nearly a decade removed from the last significant decline in your investments, bracing for a downturn might seem like no big deal. Let’s go back and paint a picture of where we were then.
The Dow is freefalling with no end in sight. Housing prices are plummeting. Lehman Brothers is bankrupt and Bear Sterns, AIG and General Motors are on the brink of failure. You or someone you know has lost their job and maybe their home. You can’t avoid thinking about the market. The economy is the story, every day, everywhere. You can’t watch TV, listen to the radio or open an internet browser without being reminded that more of your hard-earned, hard-saved nest egg is – poof – gone. Every day you get up for hundreds of days in a row and witness what might be the collapse of the global market.
Your vacation is canceled. The update to the kitchen is on hold. You aren’t even thinking about retirement anymore. You log in for the fifth time today to find that your growth portfolio that was worth $1,000,000 7 months ago is now worth $620,000. You call your advisor and are told that rather than selling what’s left and burying it in the backyard, you should put more money into this failing market.
Are you feeling it? The anxiety, the uncertainty, the skepticism or even the anger? The urge to do something? It’s from this mind frame that you can start to prepare yourself for the next downturn.
The concept of “coping ahead” is about practicing how to regulate your behaviors in emotionally intense situations. It’s basically an emotional fire drill. You visualize yourself experiencing something with as much vivid detail as you can. As you walk yourself through it in your mind, things should happen in the first person and in present time. You shouldn’t be watching yourself experience it; you should be experiencing it here and now. As you mentally simulate this scenario, notice what emotions you are feeling. Notice what thoughts are coming up. Notice any physical responses. Your feelings, thoughts and sensations are your smoke alarm. Observing them now will help you recognize them later, so you know it’s time to put your crisis plan into action.
A fire drill or crisis plan exists for one purpose – to keep you from doing self-harm during emotional upheaval. We practice for fires, so we don’t end up jumping out a second story window. We practice for bad markets, so we don’t end up jumping out of stocks at low prices. We practice so we don’t do something that might seem logical at the time but will actually hurt us in the long run.
After you’ve observed your thoughts and feelings, proceed to visualizing your crisis plan. See yourself handling the stress of the downturn successfully. What does that look like? Turning off the TV? Looking at your investments no more than once a day or once a week? Giving yourself a waiting period before making any snap decisions? Looking at the cash you have in the bank for reassurance? Pulling out a note of encouragement you wrote to yourself? Thinking about how you successfully made it through bad markets in the past? Listing all the things you are grateful for that the market can’t take away? Meeting with us to review your financial plan? See your obstacles, meet them and overcome them in your mind.
I don’t expect this exercise to change your feelings about down markets, but it could very well change your response to those emotions. Your choices in times of panic will directly impact your degree of success as an investor. They will certainly have far more impact than the day, month or year of the next correction. So, instead of asking yourself when the next down market is going to come, ask yourself instead how you will navigate it successfully. It might seem like a waste of time, but all fire drills do until there’s a fire.