Normal Events and Abnormal Reactions

By: Reed C Fraasa, CFP®, AIF®, RLP®

Having raised five children, if there was one piece of wisdom I could pass on to them (beyond the need for a spiritual foundation), it would be that in life you will not always be able to control what happens to you, but you can control how you respond to what happens to you.

Since January 26th, the stock market went into a seventeen-day correction with a 10.16% loss.  A loss of 10.16% requires a gain of 11.31% to recover.  Some of the losses were regained on Friday and today appears to be a positive day in the market.  What was notably reported in the media was the high volatility while the market was losing ground.  However, this correction and the high volatility are normal events.  In fact, they are expected events.  We should expect corrections to occur every one to three years.  Academics will say that we are experiencing the risk that produces the rewards and long-term results we expect for holding equities.  A normal event, but it doesn’t mean people will chose to react as if it is normal.

This is similar to a weather event.  Those of us in the northeast expect to have one to three Nor’easters per winter.  A Nor’easter is a powerful, wet system with tropical force winds that dumps a lot of snow or freezing rain.  A normal and expected event.  While in the middle of a Nor’easter, even though we may remind ourselves how normal it is, we can feel very unsure and unsafe. However, we also know that spring is only weeks away, and with spring comes new growth.

Since the beginning of the current bull market in the spring of 2009, we have experienced 10 corrections of 9% or more.  That is more than one correction per year during a nine-year bull market.  The corrections have ranged from a 9% loss to over 21% loss and the typical recovery has been from about one month to five months.  The table below illustrates the frequency and amount of loss.  Each of those corrections had a different story attached to it, a different explanation, all with the benefit of 20/20 hindsight. 

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Victor Frankl, the holocaust survivor and noted neurologist and psychologist, stated, “Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.”

Our mission at HIGHLAND is to co-create the life changing experience of financial progress and freedom for our clients.  In the middle of this correction, a client shared some wisdom they passed on to their children:

OK, Chicken Little -- it looks like the sky is falling -- but it isn't -- not really. 
You enjoyed the ride up -- now relax and suffer the ride down. These things happen if you are invested in stocks and bonds. I've been through these before several times. I have learned to have confidence in the US market and have, thanks to HIGHLAND's planning, allowed the situation run its course. If you stay the course, you will recover the losses and in a few years see this as just a blip in a continued rise in the market. Unless you are in dire need for funds, leave things as they are.
I trust you will not panic -- things will get worse before they get better. So, just hold your nose and enjoy the ride.  That's what Mom and I will be doing.

Market corrections, like Nor’easters, are normal events.  The difference is how we choose to respond to them.  Having a plan in place will help you be prepared for a Nor’easter, and a plan will help you be prepared for a market correction.  A financial plan for your investment portfolio is the difference.