As you approach an intersection when driving, you have to be aware of a number of factors. Is there a traffic light or a stop sign ahead? Are pedestrians about to cross?
The point is there’s a lot going on whenever you’re behind the wheel. Most of the time it’s no problem. But in a storm, it’s easy to become nervous and white knuckled. In difficult circumstances training and experience can help you see your way through.
I liken that to the role of financial planning under today’s market conditions. Your plan of action is not only determined by your emotions and objectives, but also by technical and historical aspects of investing.
You’re aware and comfortable most days. But occasionally there are financial storms, as we have recently experienced. So how do you react and remain calm? Let’s look at it from some historical perspectives.
Keep in mind that, even with the entire history of financial statistics available, nobody can truly predict the future. In simple terms, past performance never guarantees future results.
A common measuring stick of the stock market is the Dow Jones Industrial Average. Using the Dow index as our measuring tool and looking all the way back to 1942, there’s plenty of data to help mitigate financial stress. On average, there’s a five percent decline three times per year.
The average duration of that decline was just about 40 days. Not too stressful at all. The last decline of this magnitude was October of last year.
Experienced investors are aware that declines are often more severe. Market declines of 10 percent occur on average of every 17 months and last just over four months. But, even a 10 percent decline shouldn’t cause the blood pressure to rise for the seasoned investor.
But declines in excess of 10 percent do occur, and this is where you can hear your heartbeat, and become panicky and white knuckled. Periodically there’s even a decline of 20 percent or more. The last one of this magnitude occurred in March 2020. Historically, declines of 20 percent or more occur about every six years and last around 400 days.
Remember, this data goes all the way back to 1942 and the numbers are just averages. But average doesn’t mean always. In fact, that decline of March 2020 is a good example of recent history that doesn’t follow the historical average.
Again, using the Dow Jones as a measuring stick, the market did decline more than 20 percent last March. But the decline didn’t last anywhere near 400 days. It bounced back relatively quickly in what’s known as a V-shaped recovery.
Historical statistics clearly show the investment world has its ups and downs. Looking at the data can be helpful and insightful, but should never be the only factor in making your future decisions. Remember that when you drive your vehicle you don’t just check the rear view mirror. You keep your eyes on the road ahead.
Simply stated, financial storms are part of the financial climate. You should always be prepared because downturns are inevitable. Financial education along with proper preparation can help most get through the darkest of financial storms. If you’re uncomfortable, I suggest you review your portfolio with your financial advisor.
Do you know someone who would like to meet with a financial advisor?
Ken Morris 248.952.1744
E-mail your questions to email@example.com
Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.