Last week Don and I sent out a special newsletter that highlighted historical market volatility and average recovery time it has taken the markets to return to previous highs. For example, investors can expect draws down of approximately 10% about once a year. A market drop of 10% is commonly referred to as a “correction”. From the bottom of a correction it takes about 8 months to recover.
For this month’s letter I started thinking back to my time spent in the military and, interestingly, the couple of times I have taken a cruise. Before any high risk operation in the military, a safety briefing is always performed to ensure that all risk are properly mitigated to the greatest extent possible. However, all risk cannot be fully mitigated all the time. Another interesting fact about military safety briefings is that you must conduct one for every event or operation. Not only did this include night time operations, high altitude operations and close quarter operations, but also parades, mainly physical training, intra-battalion softball games and even holiday weekends. When you take a cruise before departing the port, the ship staff will conduct a muster drill that requires all passengers to don their life preserver and move to their appointed life boat station. The purpose of safety briefings and lifeboat drills are to acclimate the soldier or passenger to the fact that every activity you do from playing softball to enjoying your Caribbean cruise involves risk and you must be prepared “in the unlikely event” of an accident.
In investing, investors should also conduct “lifeboat drills” and “safety briefings” with respect to their financial goals and objectives and investment and retirements accounts. The Federal Aviation Administration call it “Managing the Unexpected.” A recent FAA Safety Briefing said, “Fatal general aviation accidents often result from inappropriate responses to unexpected events. Humans are subject to a ‘startle response’ when they are faced with unexpected emergency situations and may delay action or initiate inappropriate action in response to the emergency. Training and preparation can reduce startle response time and promote more effective and timely responses to emergencies.”
Markets move up and down every day. So, how can we help reduce your “startle response” to the recent and significant down market movements. There are these questions to ask yourself when feeling anxiety and the recent market. First, what am I trying to accomplish? As in any military operation or when flying an airplane, planning is an important first step to reach your financial goals. Here at The Nalls Sherbakoff Group, your long-term financial goals and objectives drive the investment decisions regarding asset allocations and cash management. Having your financial plan in place prevents your emotions or “startle response” forcing you to make an inappropriate decision.
Second, how will we know that a charge is an improvement? If you make an emotional decision to sell out of the market and turn a paper loss into an actual loss, that change will not be an improvement. In addition, to now having an actual loss, you must make another near perfect decision on when to come back into the market. A well thought asset allocation is the basis of good investment planning and going to cash will not improve that allocation.
Third, what changes can we make that will result in improvement? Rehearse your lifeboat drills. Ask yourself, if the market is down 15% how will that affect my long-term financial plan? Each month you may be making purchase in your 401(k) or under a make a long-term investment plan into an IRA or Roth IRA. If so, you are buying at some of the best times this year in the market. Perhaps you have unallocated cash, now may be a good time to buy in or begin systematic purchases. Ask yourself, what changes have occurred in my personal life that would warrant changes to my long-term financial plan or asset allocation. If none, stay the course. If so, then we should schedule a meeting soon.
If these three questions do drive you forward making a change, please give us a call. Or, perhaps, you want to revalidate your plan, goals and objectives, If so, let’s get together. If you feel it’s time to have another “safety briefing” to examine your risks and mitigation strategies or rehearse some “lifeboat drills,” let’s get together.
As always, we are humbled that you’ve placed your trust in our firm. It is something we never take for granted.