Keep Calm and Invest On.....Submitted by Ballard Associates on April 26th, 2016
Keep Calm and Invest On….
“The market is the most efficient mechanism anywhere in the world for transferring wealth from the impatient to patient people”
Warren Buffet – Business Magnate and Investor
This may sound a bit contrarian to the norm. However, doing nothing while the market is in a correction takes both experience and discipline. The key lays with understanding that it’s a natural and reoccurring phenomena that makes room for growth and prosperity. This knowledge grants one the patience necessary to make wise decisions in seemingly chaotic times. Patience is the key in the realization that stock market declines are a necessary and natural part of investing according to historical data analysis. Reacting based on a fear contingent and removing funds after a market decline is one of the most disadvantageous positions for an investor. “Taking money out of the market during declines means that if you don’t get back in at the right time, you’ll miss the full benefit of market recoveries.” (American Funds, 16’) Although recoveries aren’t guaranteed, the data shows that…. “Every S&P 500*downturn of about 15% or more since the 1930’s has been followed by a recovery.” (American Funds, 16’)
The most recent decline, 07’-09’ is undoubtedly remembered with a negative sentiment by most investors. Regardless of the investor’s position in the market or their portfolio’s market exposure, our brains have 07’-09’ filed in the folder, “Catastrophic Economic Event”, sub-folder, “Loss of more than %50”. When the market declines, and the media attaches apocalyptic adjectives to the data, investors act as though they are in a fire, reaching for water to put it out, but it’s not that simple. Simply put, the choices are buy, sell, or do nothing. The patient investor does nothing at all. The opportunistic investor sees cheap stocks and “Buy low and sell high.” is making a lot of sense. Some investors didn’t see or hear opportunity from the panic set forth by the media and may have already taken a defensive stance. If the choice made is to sell, the market decline turns into a capital loss for the investor and removes the potential for possible gains when the market rebounds. A call to a Financial Advisor is critical because we have historical data that helps us formulate an idea as to what might happen next. The very next year the rebound took the market well into positive territory. We tend not to remember the positive periods following the decline as well as the decline itself. This is human nature, as ones economic security is threatened, the emotions experienced during those times become part of that memory and any other memory connected to that event. Knowing that the market is historically resilient, with returns in the first year after each market decline ranged from 18.76% to 137.60%, and averaged 54.78%.
The chart below shows the five largest declines from 1929-2014 and the subsequent 5 year periods following the declines.
"Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results"