February 5th 2018 started as a regular old Monday. The Eagles just won the Super Bowl and I was very happy. Then the stock market opened…
Before you knew it, the Dow Jones dropped 1,600 points. It caught everyone off guard. By 4pm, we experienced the worst single declining day of the Dow Jones ever. It dropped a whopping 1,175 points!
As the dust settles, there are lessons to be learned from this event. As my mother-in-law loves to say: “it would be a shame.” Well, it would be a shame if we didn’t let this experience better position us for the future.
Lesson 1: Diversification works.
This is exactly why we preach Diversification all the time! (Heck, it’s even the name of our company.) In a day where the Dow dropped -4.12%, the EAFE (international) index was down only -2.78% and the Barclays US bond index was actually up .29%.
We tend to see this often. When one area is down, money flows to another. When this shift happens, the asset class where the money is flowing naturally increases in value. The moral here? Stay diversified.
It may not be the sexiest thing when markets are running wild. But in times of turmoil, those that remain dedicated to diversification will always have a smart place to take money when needed.
Lesson 2: Remain calm.
As financial coaches, this is a huge value we provide. Now, we know why. Acting out of fear (or greed) is a recipe for disaster. As a matter of fact, the only people who lost on Monday the 5th are the ones who sold. They locked in that loss.
These people likely acted on emotion, rather than trust their strategies. It’s important for us to recognize that over the past 21 years, six of the best 10 days came within two weeks of the worst days. In fact, look no further than the day after the recent 1,100 point decline. The next day, the Dow Jones index rose 567 points; it’s best day since 2016.
Lesson 3: This is normal.
This was a horrible day for equity investors, true. However, intra-year market declines are normal. The S&P 500 averages -13.8% decline intra-year despite the S&P ending the year positive 29 out of the past 38 years. Despite that normal occurrence, the S&P’s calendar-year returns have been positive 29 years out of the past 38.
Lesson 4: Review your risk tolerance.
If it’s been a few years since you had real dialogue on this topic, now is a good time. It’s important to make sure you’re aligned with you upside and downside potentials. Once you are, it should create a better sense of calm during volatile times. It’s easy during a nine year bull market to want to justify out of your comfort zone, but just make sure you recognize the consequences.
Lesson 5: Timing the market is a fool’s game.
The stock market can’t be timed. Period! Anyone who suggests it can, is wrong (or a self-made billionaire). You guess right once, great. But you’ll have to guess right a second time, which is virtually impossible. It would have to look like this: someone in October 2007 decided the market has too much run up and got out. Then, they needed the moxie to reinvest in March 2009 when the state of our economy was horrific. Show me that fortune teller and the next drink is on me!
Lesson 6: Investing is a long game.
Intelligent investing doesn’t focus on the short game. Recognize you bat for averages, not homeruns, when it comes to investing. Find a financial partner you trust. Get your risk tolerance in order and plan long term. Then, you can relax and let the next 10 years go by. Your investments will do what they are meant to do.
Lessons Over: Time for a drink!
So, now what? First, I’d suggest pouring a nice tall cocktail (Jack and Coke for me) to calm your nerves. Next, remember that the 24-hour news agencies thrive off emotions. I suggest tuning them out. Turn to the people (or institutions) you trust. When someone says, “this time is different”, you now have the tools (these lessons) to tell them, “No, it’s not”.