When I was a kid in grade school we routinely had fire drills rehearsing procedures to be used in case of emergency. Inevitably, we ended up in the schoolyard on a cold, blustery day. My classmates and I saw the exercise as a great way to get out of class until one day it was for real. The auditorium caught fire and there we were, staring silently in amazement as a black plume of smoke rose into the sky.
Every once in a while, it is important to remind ourselves that capital markets are prone to their own type of fires.
“Volatility” is a term market pundits use for rapidly changing stock prices, especially to the downside. Market downturns occur unexpectedly and can cause fear filled investors to second-guess long term strategies in favor of “sell at any price.”
In spite of these downturns, stocks generally deliver higher returns over longer periods of time.
Stock markets around the globe have been quite calm for the past few months and some claim that markets are “overdue” for a downturn. The future is unknowable but an occasional check up from the neck up is never a bad idea.
As investors, we need to ask ourselves what can we really handle in terms of a market decline? This exercise is best conducted in dollars and not percentage points. A twenty percent loss may not sound like a lot, but losing $200k has its own special sting.
If a global panic causes stock prices to fall precipitously, what will your reaction be?
Since 1987, there have been five global stock market declines of more than 20%. That means we have a major market downturn, on average, every four years. Fearing a market sell off is like fearing a Leap Year.
US markets have experienced eight straight years of gains and we haven’t seen a 20% decline in five and a half years. Through all the political uncertainty and global chaos, markets have been incredibly resilient.
Smart investors define success in years, not months or weeks. The mantra “it’s different this time” has never proven true. Keeping your emotions in check is a key ingredient for a successful investment experience.
Thanks to routine fire drills, no one was injured in the auditorium fire. Students and faculty were prepared for the emergency and practice paid off. The fire started in the kitchen and was quickly extinguished by the school janitor.