A market correction is the perfect time to open your statements and perform a “muster drill” (an emergency test) by testing and verifying your portfolio performance and strength in extreme market conditions.
A muster drill is a tedious exercise conducted by the crew of a ship with all of the passengers on board putting on cumbersome life vests prior to embarking and running through emergency procedures. With this practice, you will know the alert signal and where to ‘muster’, allowing for less panic and worry in the event of a cruise or stock market emergency.
Many investors have been a bit lackadaisical with their investments and a bit too euphoric over the past 6 ½ years with the 200%+ market run with minimal swells. Because of the past calm weather before the storm, many investors were a bit shocked by the 10% market correction in August, which has been long overdue with many global headwinds pricing into the markets.
We empathize with our clients. Nobody likes losing money or seeing big drops in the US Markets at any age. As our client’s financial navigator, we need to be the voice of reason while providing direction and verification through the fog of complex data and hurricane-like news reports. Advisors telling clients over the phone to just “hold on and stay the course,” or “not to worry” is not enough information to instill confidence in uncertain times.
We tell our clients that In extreme market conditions, it’s not about the strength of the hurricane, it’s about the strength, allocation and downside performance of your portfolio tied into your own long term emotional resolve. Successful long term investing is equal parts market strategy and investor psychology.
Tracking your portfolio returns and volatility through the storm, while taking in the media reports with a grain of salt, can help you to become a more disciplined and less emotional investor.The following are 3 things to do after a market correction.
1. Benchmark your performance: A market correction marks an excellent wake up call and time to evaluate your investment holdings as well as to measure your portfolio’s performance against the S&P 500 or Dow DJIA indices. As important, you should benchmark your portfolio against a “blended” benchmark of sectors that matches your specific “target” risk allocations. This is not the time to be shuffling your statements under the carpet.
While diversified investors in balanced portfolios may not be greatly weighted in the S&P 500 or DJIA indices, we continue to utilize these ‘benchmark news indicators’ as they are easy to recognize, and a good barometer of what is going on in the news and the capital markets.
For example, if the Dow DJIA index, is down -12% for the year and your “moderate” risk allocated portfolio is only down -3% on your statements (which also matches your “target” blended benchmark returns), you will acutely understand how well your portfolio is holding up, and how much volatility you may incur in more extreme situations.
We find that most investors unfortunately have little idea of exactly what percent their portfolio returned as a whole in down markets, or if their losses on their statements are “reasonable” based on their risk tolerance and investment goals.
This comes as no surprise as most broker-dealer and wire house statements only indicate monthly returns (up or down) and not total performance numbers since inception or over specific periods of time. This is why it is imperative to meet with your advisor in order to track and review your actual portfolio performance results.
If your portfolio is greatly underperforming your target risk model benchmark, you may need to review and make changes to your strategy. “Buy, hold and hope” is not a smart strategy to utilize in volatile markets.
2. Measure your emotional resolve: For investors with a long term plan who are invested in in suitable, resilient, diversified portfolios, we do not recommend “panic selling” 100% out of their portfolio into cash after a correction, which can lead to significant underperformance over time and not meeting your long term goals.
During the August market correction, Burt White, CIO of LPL Financial summed up investor behavior nicely in one tweet: “If you wake up in the morning, see the news and think “maybe I should sell everything- it’s either too late or a bad decision.”
We find that time after time, many investors’ significant underperformance is correlated to their own emotional behavior, more so than the performance of the markets themselves.
In economics and decision theory, loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. This can lead investors to buy and sell at the wrong times. A robust market correction is a great time to put on your life jacket and check your emotional resolve as a test run for more severe market volatility in the future.
Like a roller-coaster, our average speed over time may be 30 MPH, but sometimes we may be going 70MPH downhill or 10 MPH up hill. Our goal is to make sure our clients can stomach the risk level they selected and don’t end up jumping off the roller coaster (or boat) at the wrong time.
3. Discount the headlines: How you put market corrections and crashes in perspective vs the hurricane -like financial news reports can help to suppress your fears and anxiety.
When the Dow DJIA fell by 531 points on Friday August 21st, many TV shows and news headlines were utilizing scary terms like “bloodbath” and “death cross” for this pithy 3% market move.By comparison, when the Dow lost 508 points on Black Monday in October 1987, it was a selloff of about 22% in one day.
We remind our clients to pay “some”attention to the chicken-little news reports, but don’t over analyze what the talking heads are saying. None of them can correctly predict what the future holds for the stock market any more than you can correctly predict who will win the Super bowl.
Just remember, outside of the start of football season, the Presidential debates or an approaching hurricane, market swings equal huge ratings.
After stocks have gone up 4 straight years without a correction, the current decline is a painful but necessary step to “clear out” any market excess while paving the way for further advances.
Whether your management strategy is do-it-yourself (DIY), Robo-Advisor or a Human Financial Advisor, consider to view market corrections as a great time for an “emergency drill” and opportunity to step back and review your current results and procedures against your short term feelings about risk and long term financial goals.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.