Have you ever soaked in a hot tub for a little while and then jumped into a pool? The pool water feels even colder than it normally would, doesn’t it? That’s because you’ve been sitting in warm water long enough for your body to adapt to the temperature and it almost feels “normal” after awhile. Then, when you jump into water that sits at a significantly lower temperature than the hot tub, your body can’t adjust and it just doesn’t feel like it did earlier that day, when it was 80 degrees outside!
Now, if you instead stepped out of the hot tub slowly, waited for a few minutes for your body to adjust back to its core temperature, and then eased your way into the pool, it wouldn’t be as big of a shock, right?
If you remember back to January of this year (2018), the market was hot and had been kicking on all cylinders, without a real drop in value, for more than 12 months. This unsustainable rally ended quickly on February 2nd, when the Dow dropped over 650 points. By the end of the week, the correction turned into the largest decline since January of 2016.
If you turned on any major market channel that day, it was pretty chaotic and fear-provoking, especially to the every-day investor. Market participants went from a state of relaxation, sitting back and enjoying a worry-free, northward trekking stock market in their metaphorical hot tub, to being tossed into the “normal” pool of market reality… and it stung more than it should have.
If you study the history of the markets, and analyze past declines, you’ll realize that mild market declines such as the one we just experienced (and worse) take place more often than most investors remember. The table below sets pretty fair expectations for those of us who forget how normal it is for the market to flex and breathe, as it’s supposed to.
Let’s pretend for a second. Rather than the ridiculously unsustainable rally we experienced throughout 2017, let’s imagine we instead experienced a normal 5% pullback in the stock market, and let’s just say it lasted six weeks (roughly the average length of a 5% decline) before resuming its uptrend.
Now let’s pretend that, instead of a nicely positive calendar-turn into the 2018 new year (like we experienced this year), the market instead dropped another 5% before resuming its uptrend.
Walking into February of this year, the 650-point drop in the Dow may not have startled as many investors, because in some way, psychologically and behaviorally, we were “used to” the market doing what it normally does anyway. After all, the stock market experiences roughly three pullbacks of -3-5% each year, on average.
Nevertheless, the media would, and always will continue the inevitable attention-seeking behavior. Can you blame them? They need ratings to get paid, so they need you watching and listening to the news. For this reason, alone, scaring investors into worrying about an imminent market crash around the corner does just that – boosts ratings.
It will never be satisfying, over any time-frame, to see your hard-earned retirement savings fall in value. However, if you combine the education, knowledge, and understanding of what kind of market behavior is normal and what isn’t, with an active, tactical investment strategy, the resulting confidence can reduce stress and allow you to become more comfortable with the routine inhales and exhales of the markets.
Til next time…
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