Since I earned my Bachelor’s degree, I have experienced many -10 percent “corrections” in the S&P 500. I’ve also seen many more drops that seemed somewhat scary at the time but did not reach that -10 percent threshold. 2017 was one of only two years since I entered the work force in 1989 in which there was not at least one drop of 5 percent or more during the year. My entire working career has been one characterized by a steady supply of faux crises.
The media attention to these events has been consistent. First are reports that the recent drop is the beginning of a massive decline or at least a bear market. If the start of the drop is sudden, reports often take on a tone of shock and devastation. We saw some of this with Dow’s 1,000+ point drop to kick off this most recent correction.
Next come the rash of stories about what to do now that the market has changed so significantly. Proponents of active management and alternative investments get lots of play here.
Then come the voices of long-term prudence. Most financial planners would be in this category. Don’t panic. This is normal. Selling is a mistake.
“Don’t panic” is sound advice but delivered the wrong way, it can also induce stress. If the advisor is saying don’t panic, there must be something bad happening, the thinking goes. Our company’s motto is “A sanctuary from the noise” so we are careful not to fill clients’ inboxes with breathless analysis of the news of the day.
Accordingly, we addressed the market’s activity during our regularly scheduled communication in mid-February. No special email blasts. If we want them to take volatility in stride, we believe we should model that behavior ourselves.
In addition to the many relatively minor downturns, my career also covered two pretty nasty periods, the dot-bomb bust and the 2008 financial crisis. Both took many months to reach bottom. Some clients were panicky. The 2008 crisis was particularly tough because it was harder to understand. Internet stocks cratering in the early 2000s made some sense, but in 2008 most people had no clue about mark-to-market accounting or whether what the Fed was doing to intervene had any chance of success.
Worse though were the many “advisors” that were also panicked, and recommended clients make radical changes to their portfolios. A panicked advisor is the last thing a client needs in tough times and many cracked under the pressure.
There is a saying in coaching, “Pressure is something you feel when you are not prepared.” That’s why practice is so important. Given the rush to tell clients not to panic, it seems like advisors are worried their clients will panic. That makes me wonder whether advisors have done a good job of preparing clients for downturns. Whether this correction portends the next bear market or not, the bear will growl again.
“This is normal, don’t worry about it” is reasonable advice, but if that message isn’t delivered with some nuance, I think it could contribute to making clients more prone to panic. The last several downturns haven’t lasted very long. It was easy to stick with a plan.