About once a year on average, global stock markets go a bit crazy, dropping in value by about 10%. Well, actually, using the S&P 500 Index as our guide, the average intra-year decline over the past 30 years has been even a bit higher at 14.2% per year. As we post this Q&A, some markets have dropped even more than that, but certainly not to unprecedented depths.
Whenever these declines or worse happen with their relative routine frequency, the Chicken Little pundits among us scramble about, proclaiming that the sky has fallen for good. As financial columnist Barry Ritholtz describes in his Washington Post column: “The usual subjects panic. Eventually things stabilize. And everyone wonders what the hell just happened. Post-mortem explanations come along that seem reasonable (after the fact, of course, never before) … Lather, rinse, repeat.”
While I personally would like to have a good explanation for this behaviour, I don’t. That is what markets do, at least in the near-term: They rise, they fall, and sometimes they fall a lot. Over the long-term, this volatility evens out into what appears to be a leisurely uphill climb … at least when viewed from a comfortable distance.
So rather than try to explain the unexplainable, as the popular financial media tries to do, we thought we’d share a headline of our own:
The stock market is a giant distraction to the business of investing.”
So said Vanguard founder John Bogle in his 2007 classic, “The Little Book of Common Sense Investing.” These are timeless words to invest by, as is Bogle’s deeper explanation of them:
The expectations market is about speculation. The real market is about investing. The only logical conclusion: the stock market is a giant distraction that causes investors to focus on transitory and volatile investment expectations rather than on what is really important – the gradual accumulation of the returns earned by corporate business.”
All this said, we can understand why investors want to know whether they can or should be doing anything while they wait for the markets to return to their senses and their expected uphill climb. After all, we members of the human race haven’t thrived as we have by sitting on our collective behinds.
The vast majority of quick-take advice you’ll read is to do nothing or “stay the course”, and I certainly agree with that … at least as it applies to your well-crafted investment strategy. As long as your strategy made sense for you before expected market risks appeared, it should still make every bit as much sense during trying times.
But let me take a different approach on this, and suggest some of the other “controllables” you may want to act on during down markets.
- Rebalance to your target strategy if you are significantly off course.
- Save more. One way to shore up your financial future is to save more than you think you will need.
- Spend less – especially if you are taking regular cash flow from your investments.
- Stick with your savings strategy. If, for example, you always make a TFSA/RRSP contribution in January / February, don’t let recent market movements distract you from this or make you procrastinate. (Remember, if you stick with your savings discipline and invest these savings, you’ll be “buying low” while you’re at it.)
- Harvest capital losses in taxable accounts – if available and if there is an expected tangible benefit for doing so.
- Notice your state of mind. If you suspect your usual common sense is being clouded by fear or panic, you will probably be best off ignoring your errant instincts and postponing any big financial decisions until they can be governed by reason rather than emotion.
Part of my role as an advisor is to be constantly bringing people to their middle ground. By that I mean, making sure they don’t become overly optimistic when returns from the market or certain asset classes are very strong, or overly pessimistic when returns are very weak. This is sometimes referred to as “behavioural coaching,” which, according to a Vanguard analysis, can potentially add in the range of 1.5% of value to a portfolio over time.
So, while I could indulge in incredible analyses of the latest economic news – China, oil, interest rates and so on – I won’t.
Two things I do know are as follows:
- With decades of empirical evidence as our guide, the odds are stacked strongly in our favor that this too (current market mayhem) shall pass.
- Even if worse comes to worst, we’ll have followed the best possible strategy for making the most of the factors we are able to control.
If you could use some additional coaching to see your way through during the darkened skies, don’t hesitate to be in touch.