With the markets in free fall, this is a perfect time for retirement savers to panic. That’s probably not a good thing. Well known financial blogger Roger Wohlner, in his particularly witty style, suggests investors take four steps to cope with the rather unsettling markets (see “4 Things To Do When The Stock Market Drops,” The Chicago Financial Planner, January 7, 2016). In short, Wohlner suggests investors breathe, reflect, review, and go shopping. In many ways, this is the kind of sound advice we would expect to hear from an experienced veteran.
And Wohlner is not alone. Richard Zeitz, President of Bravias Financial, located in East Brunswick, New Jersey, says, “With over 21 years of industry experience, I have been through many falling or extremely volatile markets, and the rules, tips, and mistakes are typically the same, and often repeat. Obviously, when the market is free-falling many people tend to panic and act by impulse by selling off some positions. Advice regarding falling markets ranges dramatically based on age of the investor and time horizons.”
With that in mind, let’s look at some of the more common rules, tips, and mistakes industry pros advise, share, and warn retirement savers about.
The Three Most Important Rules All Long-Term Investors Must Abide By During Falling Markets
#1: Don’t Panic, Don’t Sell, and, Above All, Don’t Try to Time the Market: What’s the first thing most casual long-term investors do at the sign of a falling market? They allow their emotions to take over and begin contemplating what most investment advisers will call the absolutely worst decision they could make. They think of selling. What, then, is the rallying cry of these seasoned professionals? “Don’t panic. Don’t sell. During down markets there will be a lot of short term noise that can negatively affect your long term decisions,” says Zach Stuppy, President at Brave Boat Capital Advisors in Boston, Massachusetts.
Truth be told, there are perfectly normal psychological reasons why investors have a knee-jerk response when they see a falling market. That doesn’t mean folks should succumb to this. Claudia Arnold-Sawaf, Founder & Wealth Manager at Sawaf Financial, LLC in Scottsdale, Arizona, says, “Do not sell-out, as tempting as it may seem.”
People often forget they were just as irrationally excited when the market was going up as they are irrationally anxious when they see the market going down. Behavioral economists call it “recency” – the tendency to extrapolate recent events far into the future as if current trends will continue. But, as the saying goes, what goes up must come down and, likewise, what goes down must go up. To this effect, Pauline Paquin, a blogger at reachfinancialindependence.com, says, “Leave your investments as they are and do not be tempted to sell. Markets will go up eventually.”
If you want to look at this from a rational perspective, stock prices are a real-time indicator of the market’s mood. Successful investing, to some extent, is predicated on anticipating movements in stock prices, not reacting to them. “Future market expectations are built in to current market prices. So acting (or re-acting) to market fluctuations is like shutting the barn door after the horse has left,” says Dennis P. Gogarty, President at Raffa Wealth Management, LLC in Washington, DC.
Given the importance of behavioral, consistent discipline becomes a critical character trait for long-term investors. It’s too easy to mimic Arnold and claim “I’ll be back,” but actual behavior suggests otherwise. Stephen K. Davis, President & SEC Registered Principal at Safe Harbor Asset Management in Huntington, New York, says, “Don’t pull out because you will never be able to get back in”
So it’s best to be calm, cool, and collective when approaching falling markets. Rest assured, history is on your side. In effect, we’ve seen all this before and, while we can’t know for certain when markets will eventually turn around, we know they always do. “Realize that market corrections are actually normal, and give investors a chance to reinvest dividends, interest, and retirement savings at more attractive prices,” says John Cheshire, Director of Private Client Group and Senior Portfolio Manager Dividend Assets Capital in Ridgeland, South Carolina. “Corrections and market shocks are a regular occurrence, and happen on average every 2 to 3 years. Expect them in the future, and don’t panic when they happen.”
Jason Preti, founder of Unleashed Financial LLC in Kirkland, Washington reminds us of an old adage when it comes to emotional reactions to down market: “Don’t confuse short term market volatility with long term investing.”
But there is a far worse devil that tempts the long-term investor when markets fall. It isn’t just the danger of panic selling, it’s the false idol of market timing. Too many have fallen prey to this fallacy which postulates it is possible to know when to move in and out of the market. “It’s impossible to call bottoms or tops. Don’t try to time the market, put money to work over time,” says Preti.
The fear generated by collapsing markets convinces people they need to “do something” and the idea one can time the market sounds plausible. “Don’t try and time the market, especially selling to the downside,” Seth Deitchman, Associate Vice President of The Mercury Group at Morgan Stanley in Atlanta, Georgia. “Most people want to sell when the markets are down and buy when it is up….that is fear and greed leading the action process.”
Still, the financial media (especially in its advertising) is flush with “experts” purporting to successfully time the market. Don’t believe it. Gogarty says, “Investors will always hear (from the financial press and/or financial sales people) that they can successfully time the markets. Evidence suggests otherwise!”
“Success is largely determined by time in the market and not timing the market,” says Robert R. Johnson, PhD, CFA, CAIA, President and CEO of The American College of Financial Services, Bryn Mawr, Pennsylvania. “When you attempt to time the market you have to make multiple good decisions – when to get in the market, when to get out of the market and when to get back in the market. You can make one good decision and your performance can be completely undone by the next decision you make, or don’t make.”
This is not to say actions cannot be taken when the market falls. In facts, there’s one very good idea that many of the more prosperous portfolio managers practice. It represents our second most important rule…
#2 Falling Markets Present Buying Opportunities: One of the most regrettable decisions made by 401k investors following the 2008/2009 stock market debacle was to sell their equity positions. That those retirement savers are still playing catch-up while those who help onto their stocks are well ahead of the game provides a real-life example of the benefits of disciplined long-term investing. Market return data shows how stocks do well in the long-term, even compared to “safe” investments like bonds. “Recognize that markets generally go up, but not straight up,” says Johnson. “Since 1926, the equivalent of the S&P 500 has advanced in 68 of the 90 years – so on an annual basis the market advances 75% of the time. But, since 1950, the market has only advanced on 52.6% of the days. Since 1950, the worst 20 year rolling period for the S&P 500 was from 1959 through 1968 – and during that period the market advanced at the rate of 6.52% compounded annually. The best 20-year rolling return was from 1980 through 1999 when the market advanced 17.88%. And note, this best 20-year period included the stock market crash of 1987! Since 1950, the worst 20 year rolling period for long-term corporate bonds was from 1950 through 1969 and the annual compound return was a paltry 1.34%. The best 20-year rolling time period for corporate bonds was 1982 through 2001 and was 12.13% compounded annually (by the way, over that same period, large cap stocks returned 15.24%). The best way to build long-term wealth is to invest in equity securities.”
What does this suggest long-term investors should do in falling markets? “Falling markets typically present some buying opportunities,” says Pedro M. Silva, Financial Advisor at Provo Financial Services Inc. in Shrewsbury, Massachusetts. “Shares are obviously cheaper, so for those who are dollar cost averaging, it can be a great time to grow their portfolio.”
Professionals, who have the advantage of being dispassionate when it comes to market moves, have long viewed bear markets as a time to acquire more stocks. “It might seem utterly counterintuitive, but sometimes shaky market conditions can be seen as an advantage,” says Elle Kaplan, CEO & Founder of LexION Capital in New York City. “With a long-term strategy, certain stocks may be viewed as ‘on sale’ during a rough dip period. Due to the likelihood that a stock’s price will recover over time, you can purchase stocks at a reduced price. That’s why I always stress a long-term perspective. Historical data supports time and time again that short-term dips are succeeded by overall growth of the market. The market has always gone on to reach a new high after a falling period. So if you’re planning to retiree years from now, the best option may be to sit tight and stay the course.”
The concept of a “sale” one stocks presents a very approachable analogy, and one the is often used by advisers. “If you were interested in investing before the drop -providing the financials haven’t changed – now it’s ‘on-sale’,” says Preti.
Likewise, Deitchman says, “If you liked a company (equity investment) and it has gone down in price, think of it as buying it on sale. If nothing changed with the company fundamentals, but just followed the markets lower why would you not like it now?”
For retirement savers who are regularly contributing (and investing), this “buy on the dip” strategy is on auto-pilot. “Ideally, long term investors are continuing to save for retirement,” says Gogarty. “If they are, and do systematically and based on a target strategy, they will consistently be buying into markets that have fallen – buying lower!”
Which, if you think about it, gives you a good idea of what our third most important is…
#3 Stay the Course: This is only logical. Your retirement savings plan is really predicating on your own personal situation, not the present condition of the economy or the investing markets. Hayden Burrus, Principal at Forward Financial Services, LLC in Delray Beach, Florida, says, “Stay the course. If you felt comfortable owning an investment last week, you should certainly feel comfortable owning it today when it is 6% cheaper.”
If your situation doesn’t change, there’s little reason for you to reaction to a falling market (excepting, of course, for Rule #2 above). Arnold-Sawaf says, “Keep investing/contributing (even consider increasing contributions) to take advantage of volatility (concept of ‘buying low’).”
It’s vital to remember saving for your retirement is “all about you.” We’re often taught it’s immodest to think in this way, but retirement saving is one area where we can dispense with avoiding the ego. “Keep things in perspective relative to market history and keep things in perspective relative to your personal goals,” says Steven Gattuso, Assistant Professor, Finance/Economics and Golden Griffin Fund Director at Canisius College and Senior Portfolio Manager at Courier Capital LLC in Buffalo, New York.
Once you’ve taken the time and effort to come up with a plan, a falling market offers no real reason to change it. “Stick with your long term plan,” says Cheshire. “Presuming you and/or your adviser have made a long term investment plan, and set up your portfolio according to it, then there is really nothing to do that will add long term value.”
The phrase “long-term” is significant. “Stay the course,” says Johnson, “Saving for retirement is a marathon and not a sprint. Not every quarter of a mile that you run in this marathon is going to be smooth.”
As we mentioned earlier regarding 401k investors during 2008/2009, don’t be surprise to find staying the course can turn into a very profitable venture. “Many investors have gotten better returns by actually doing nothing to their portfolios,” says Paquin. “So stay put and wait for the next bull rally.”
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