Most clients have some sense of the inevitability of market corrections and pullbacks. Yet their dismay when the market corrects nonetheless poses peril for client relations.

The longer the market goes without pulling back significantly, the deeper the next dip—and the more clients are unnerved when it happens. Accordingly, it’s increasingly critical over time to assure that clients encounter the next correction with the right perspective. This means that, to borrow a phrase from the classic movie “Cool Hand Luke,” it’s important to get their “minds right.”

If clients really trust you as their advisor, their reaction to the next correction can be significantly influenced by what you say now. (Afterward is usually too late.) Effective approaches may include succinct summaries of market history, memorable metaphors on corrections’ inevitability and evangelizing on the virtues of buying the dip.

Some talking points:
• Corrections are just the price of admission to the theater of potentially outsized returns. Despite a few scary periods, the market still grew threefold between 2007 and 2020.

• Corrections and pullbacks are by no means rare. Since 1920, the S&P 500 has, on average, recorded a 5% pullback three times annually, a 10% correction every 16 months and a 20% plunge every seven years. Since 2008, there have been 16 pullbacks of more than 5%—on average, about one every nine months.

• Corrections and pullbacks are part of market cycles breathing. The market exhales during bull markets and inhales when correcting, or taking a proverbial breather. Like humans, the market can’t only inhale, or only exhale (like Bill Clinton).

• A corrected market can recover quickly. Since 1920, the average correction has lasted 43 days. If there’s a correction in the next year or so, it will likely be much briefer, amid the continuing congressional/Fed stimulus and the already-emerging post-pandemic economic recovery. Also supporting the potential for a shorter and smaller correction are projections of stellar economic growth this year. Goldman Sachs’ target for the S&P 500 by 2022 is 4,600—growth of about 18%. Further, long-term economic growth from the digital revolution and other factors suggest a realistic scenario for the Dow to hit 50,000 by 2027, regardless of any corrections.

• When asked about his plan for a fight, Mike Tyson famously said: “Everyone has a plan until they get punched in the mouth.” In stock investing, that punch is when a correction runs deep and turns into sustained bear market. But like pullbacks and corrections, bear markets are a natural occurrence that only shave small amounts of long-term gains from well-diversified equity portfolios. And even after a deep dip, like the 34% drop in March of 2020, the market can recover rapidly, as it promptly did with ensuing, current bull. This recovery was so quick that many people may think of the current bull as a continuation of the previous, 12-year bull—but they are two different markets. The current bull is only a year old.

• It’s pointless to worry about corrections because, by definition, they’re unforeseeable. The foreseeable is always baked in. Corrections could come anytime from just about anything. Imaginable causes might include: more severe new coronavirus variants unfazed by existing vaccines, the Fed’s hinting that sustained, large increases in inflation are in the offing (followed by Wall Street’s concluding that interest rates will rise sharply), trade pressure from China, or wars breaking out. And there’s an infinite flock of black swans: a big junk-bond-supported company declaring bankruptcy, the sudden death of President Joe Biden, a flash crash (like the one in 2010) triggering institutional trading algorithms and sending the market spiraling downward; or just irrational herd selling triggered purely by investors’ fears of other investors’ fear-driven behavior—fear of fear itself.

• From destruction comes rebirth. When corrections burn values, this leaves the market floor fertile for companies to grow back. The opportunity to harness this recovery by buying the dip, while retaining existing holdings that will also rebound, is the great thing about corrections; they are opportunities.

• Be ready to act when the market corrects—to buy shares low. For many, this mentality may be counterintuitive, like running into a blazing building. But that’s what firemen investors do: They go into the fire to buy damaged shares. Or, try this nautical metaphor: It takes a tempest to get deep discounts on shares. There are no great deals when the water is calm.

• To buy low, keep some powder dry. But how much? Too much cash on the sidelines may mean missing out on gains. Too little may render investors unable to take sufficient advantage of narrow windows of depressed values. A good rule of thumb for many individuals is about 10%.

Getting through to clients in fearful times can be tough, so it’s better to have these discussions now to prepare them emotionally for the next correction.

Dave Sheaff Gilreath is co-founder and chief investment officer of Sheaff Brock Investment Advisors and Sheaff Brock Institutional Group in Indianapolis, which manage more than $1 billion in assets nationwide.