By: Edward J. Leach, CFP®
Every time the stock market experiences a correction (down >10%), we hear that familiar phrase, “It’s different this time.” Since 1950, there have been 39 corrections for the S&P 500, and they have all been the result of a different set of circumstances. There have been six years when long-term government bonds lost 5% or more during the same period, all with varying circumstances. Being different doesn’t mean that the market will not recover from a correction.
Why It’s Not Different This Time
Like Shakespeare’s tragedies that tell different stories yet all follow the same 5-act elements of exposition, rising action, climax, falling action, and denouement, stock market corrections have a diverse cast of characters and plot. Still, the elements of the story are the same.
As uncertainty increases, markets become more volatile, and values decline until the uncertainty decreases and markets are perceived to be a good value – leading to more buying and an increase in prices.
Why would our advice be the same as today as it has been for prior market corrections if the circumstances are different? Assuming someone has a financial plan, being consistent and staying focused on the long-term is the best advice.
It is never advisable to make investment decisions based on emotions. The image below illustrates the emotional cycle of an investor. During periods of elation, we become overly optimistic and likely to take on more risk. During periods of fear, our primitive brain functions tell us to run away and be safe.
When market prices are highest, everyone feels good and knows a friend with a good stock tip. No matter what political party is currently in the White House or has control of Congress, they take victory laps, accrediting the incredible market growth to their leadership. Investing is easy, so we are inclined to take more risks and buy more because markets only go up.
When market prices are lowest, everyone cites financial media pundits who like to predict why the economy and everything we know will end soon. No matter what political party is currently in the White House or has control of Congress, they point fingers at circumstances out of their control, stating it isn’t their fault. Everyone has a friend telling them they moved all their investments to cash. It’s different this time, so we are inclined to sell everything and put the money in the mattress because the stock market is dangerous.
Emotional Investing Leads to Buy High and Sell Low Strategy
If we followed our emotions, we would always buy high and sell low consistently over time.
A better strategy is to buy low and sell high – buy when everyone is scared and sell when everyone is happy. If only it were that easy.
Benjamin Disraeli, Prime Minister of the United Kingdom in the 1800s, said it best – “The secret of success is constancy to purpose.”
If you applied this to investing, the most successful investor would be someone who has a long-term plan that is consistent with any market conditions. That “successful investor” sounds like Warren Buffett, whose Berkshire Hathaway purchased $40 billion of investments in Q1 of 2022.
At HIGHLAND, we remain objective and independent of any product or third-party influence. As Real Fiduciaries, we always put your interests ahead of our own and stay committed to your long-term success. During trying times we are here to help you make the right decisions to increase your odds of success over the long term.
Learn more about Highland Financial Advisors’ Investment Approach, or schedule an appointment to speak with an advisor.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their business while creating efficiencies in their business and personal financial plans. He is, also, a member of NAPFA which is dedicated to serving fee only advisors.