Welcome to 2016, eight years ago it was 2008.
In 2008, global markets crashed as they were hit with the perfect storm: the end of a credit cycle, a housing bust and a massive sell off in stocks. Many people lost their jobs, in fact it was so bad the some estimates of the unemployment rate were as high as 15-20%. People were terrified in 2008, regulators led by Tim Geithner and Ben Bernanke believed the banking system was days away from collapsing. Ultimately, thanks to fast action by congress a never before seen bank bailout was created and passed. The financial world was saved.
We bring up 2008 because so far in 2016 the stock market has been going down. As of this morning, the S&P 500 is down -10.30% for the year and -16.00% over the last six months. The downward trajectory of stocks to start the year has led many market commentators to compare this year to 2008. With the market dropping so fast, people are understandably scared. Immediately, these people believe that we are going to repeat 2008. The gut reaction for them is to panic and sell their stocks.
Panic selling is a major mistake that investors make and according to Vanguard, it has led to losses for investors. Do you run out of Target or Macy’s when there is a sale? That is what you are doing if you sell stocks during a market sell off. You are running from a sale. Remember, the goal of investing is to buy low and sell high. In fact, if you do believe that you should sell, you would be exhibiting a cognitive bias known as recency bias.
Recency bias is a when you believe that stocks have gone down and they will continue to go down. This is on the biggest errors investors make. On the other side, it’s the equivalent of buying stocks because they went up.
Circling back, did you save any money in 2008 by selling? Unless you timed the market perfectly (which is impossible) then you could have made or saved some money. I will assume most people did not time the market perfectly and ended up rebuying sometime after stocks bottomed out in 2009. Or worse, you ended up buying years later in 2012 or 2013. Studies have shown that investors are better off holding through down cycles and taking short-term pain, then getting out of the market all together.
As we have been saying for the past year, stocks have been going down since October 2014. To us, this has been a silent bear market.
Let’s look at the facts over the last year:
- The majority of global of global markets are down more than 20%.
- Some international markets are down as much as 40%.
- Apple, the largest company in the US, is down 30%.
- The average US stock is down 25%.
- US Small Cap stocks are down 25%.
- The Dow Jones Transportation index is down 25%
- Crude oil is down more than 70%
Obviously, investment returns have not been good but believing they will continue to be bad is recency bias.
We believe that investors should not act on a whim and should exhibit a disciplined approach to investing. I often tell my clients about the importance of having a strong investment philosophy and the current market environment is a reminder of why you need an investment advisor with an investment philosophy. As most already know, we let the financial plan do the talking for fiduciary investments. If the plan determines stock market exposure is necessary, we build passive, global diversified portfolios, low cost portfolios that are meant to benefit our clients.
Lastly, we wanted to give you some tips that have helped us overcome market sell offs and become better investors.
- Contribute to your account– down markets are the best time to contribute to your investment account. You could benefit from buying at lower prices. We love a dollar cost averaging strategy.
- Ignore the media– The job of the television, online and print media is to get you to watch, read and click. The producers and editors are smart, they know if they have scary stories with scary headlines, you will watch, click and read. Don’t fall into their traps. It’s never as bad as it seems.
- Don’t dwell on your account balance-I know some people that check their account balances hourly. Don’t be that person. When you’re invested in stocks and bonds, the value of your account will change every minute. Don’t stress on the day-to-day volatility of the market. Instead of obsessing over how much money you have this second, think about how much you will have in the future if you leave your account alone and let it grow.
- Don’t pay attention to your peers opinions– We all have the annoying neighbor. Maybe they live next door or maybe they sit in the cubicle across from you. This annoying person, always has an opinion and always can convince you they are right (they hardly are correct). Don’t listen to them. Your situation is unique and completely different than theirs.
- Don’t panic sell– When we create financial plans for clients, inside the plan, it doesn’t say, “sell when stocks are going down.” Our philosophy is to be a long-term passive investor.
- Overthinking-Lastly, don’t over think it. Investing is simple and often we make it more complex than it needs to be. Invest in a low-fee-globally-diversified portfolio. Once done with that step, let the portfolio age like a bottle of fine wine.