How a Big Downturn Could Impact Your Future

If you are an investor, or sit next to someone at work who is (they seem less bubbly and have a fair bit of condensation on their forehead periodically throughout the day…yea, they’re an investor), you are sure to know that the markets have been down this past week. Down big, for a normal week's standards.

These are the types of weeks advisors dread because they know their clients (a majority of their clients) will be calling in panicked about what all this means. They will be begging to sell their investments saying, “This is it, we’ve had a nice run and there’s nowhere to go but down”.

While I’m not in the business of predicting the next big downturn I would love to share a few things about these downturns or bear markets as they’re called in the industry (if you want to learn a fun fact about why they are called bear markets subscribe to my site and you’ll find out on Monday’s video ‘Stock Market Crashes’).

While the definition of a bear market can vary, the most common is a 20% or more market down period for 2 consecutive months. Some people don’t view the “consecutive months” aspect as valuable but we’ll go with it.

Since 1926 we’ve seen

8 bear markets that have lasted an average of 1.4 years

8 bull markets that have lasted an average of 9 years

-41% average cumulative losses during bears

480% average cumulative gains during bulls

*All of this data is based on the S&P 500 index and was compiled by FTPortfolios. You should really check out their chart

Pause. Reread.

What stands out? How tremendously positive the positive markets are and yet we fear the downturns more than we appreciate the upturns.

There is actually a psychological reason based on a theory Dr. Kahneman created called Loss Aversion. (Here’s a great article on his explanation). Cliff notes: We feel the pain of monetary loss 2.5 times more than we enjoy the excitement of a gain. He explains that our instincts require us to hold more wait on danger (being attacked or not having food to eat) than being happy with our feet up by the fire. Makes sense. But our money in the market isn't feeding us, or it shouldn't be...that's what your checking account is for.

While there are many reasons this volatility should be no indicator of a bear market (companies still have good fundamentals, speed to which it’s dropping) let’s just play out what a bear market would do to you and I.

My husband and I are about to put an offer on a home. We have 50% of the down payment in the markets right now and yes, they’ve dropped 4% (ouch!). Does that mean we can’t afford the house? No, it means we have to make a decision

1. We realize that our money in the markets has grown 30% in the last two years so now we're only up 25%. So...we get over it and use it to buy the house

2. We come to terms with a reality we set with ourselves, money invested in the market can drop at any point and if we're not OK with that then we don't get to buy something with it today. i.e we don’t buy the house and we keep renting

Note, none of these options were: we are homeless or we lost all our money. Downturns are scary, don’t get me wrong but even in the worst bear market in recent times there was a 41% loss. When was the last time you needed to write a check for 60% of your investments?

So what’s my moral here? The money in the markets should be for long term. And if you’re like me and you sometimes co-mingle that, make sure you’re prepared to not use the money when you thought you would. If you need the money for basic living expenses, travel, fixing your car, medical expenses – the market is not for you…even in the best bull market. Don't let the market movement impact your future. If we know it will go up even after it goes down, turn off the news and enjoy some time outside while things are volatile.

Let’s do our advisors a favor this week and try to get outside or have a drink with friends instead of picking up the phone. Things will get better if history has anything to say about it. Who knows, maybe even 100% better….

Happy investing


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