When The Storm Hits: Avoiding Inaction During Turbulent Markets
Philip Kim CFP®, ChFC®, CLU®, RICP®, CRES
(5 minute read)
One of the main reasons to invest is to outpace inflation and have our money work for us over time. But it’s not always sunshine and rainbows, is it? Investing can be a true test of one’s willpower because of the inherent leap of faith one must take to commit to something as intangible and seemingly uncontrollable as the stock market.
Have you ever been so anxious or so afraid to do something that you find yourself paralyzed with fear? There is the physiological reaction of “fight or flight,” and pop culture oftentimes will capitalize on this basic human response. You know of those scenes in war movies where a young, inexperienced soldier is pinned against a wall while taking heavy enemy fire. He stays glued to the wall, overcome with panic, while enemy fire batters his position. If he's lucky, a battle-hardened sergeant grabs him by the arm and forces him to move keep moving. Otherwise, our would-be hero’s storyline ends there.
Or you might be familiar with the famous scene from a blockbuster hit where the feeble businessman cowers on a toilet seat in a conveniently exposed outhouse while a T. Rex comes barreling towards him. In a memorable moment, the T. Rex stoops its great neck, closes its enormous jaws around the trapped quarry, and wolfs the entire happy meal down with one gulp.
What these scenes are telling us is that being frozen with fear is most likely not the best response in a dire situation. Staying on the move, darting from cover to cover in the case of the beleaguered soldier, or racing for the jungle foliage in the case of the doomed businessman, might have been a better choice. Of course, an even better preemptive option would have been to put in the work ahead of time to be ready for such scenarios. If the infantry patsy was instead a well-trained platoon leader, the scene would have played out differently. Or if the whimpering businessman was replaced by a learned professor of anthropology, he might not have met his doom while on the john.
How does this apply to financial planning? We know that the history of the stock market is such that it goes up, and it goes down. These are market cycles that are part of the history of stock market. There have been 11 recessions over the past 80 years, each of which has been followed by economic recovery.¹ Among the various reasons for market resiliency is that the global population continues to increase, the footprint of human economic expansion continues to widen, and people continue to spend and innovate.
Unfortunately, when we have a market contraction that is accompanied by a declining stock market, this can create a state of panic. It’s natural to make emotional decisions based upon short term experiences. In my opinion, the most petrifying of these scenarios are ones where the market is in a state of decline, while the media happily feeds into this frenzy. I believe the general public is defenseless against this media barrage and is oftentimes swayed into decisions made impulsively rather than prudently.
If the market is going through a tempestuous downspin and investors slide down a muddy slope, gripped by fear, they may be faced with waiting for the storm to pass. Then, they might try to make their way back up the hill, oftentimes using the same exact equipment that they owned before the fall. Or alternately, they could wait for the descent to be finished, and vow to never go back up that hill and so remain at the bottom, regretfully accepting their lot in life. Overcome with a helpless feeling, they may not be aware of other options available to them.
Being in the middle of a market downturn, particularly a precipitous and sustained decline, accompanied by socio-economic uncertainty, can be just like a first-time rollercoaster ride. Even though you've been on other rollercoasters (e.g. other market declines) in the past, you've never been through the one that you're going through precisely at the current moment. Because of this uncertainty, irrational fear may set in. When this happens, and then you consider the “fight or flight” human condition, how does this play out?
Well, either as the soldier pinned against the wall, or the stodgy businessman cowering on the toilet, the end is not pleasant. But, what of the fearless platoon leader or the professor of anthropology? Because they understand the inherent risk of the situation, and because they can pull from historical precedent when faced with critical decisions, the outcome is likely to be far more agreeable.
Financial planning is not solely about products like stocks, bonds, CDs, cash, annuities, etc. Rather it is about the Planning and the Process -- planning to get back up that hill with newer tools and attacking that return with an improved strategy. And in a seemingly helpless scenario, restoring one’s confidence if they are hopelessly marooned at the bottom, boosting their spirits, and leading them back up that slope.
If you have a plan and a strategy in place, climbing out of these seemingly desperate scenarios can generally be accomplished with a far greater degree of resolve. This is precisely why our clients place their trust in us -- to navigate them through the turbulent storms that cycle through their lives. Sometimes, someone needs to come in, extend a helping hand, and act as a shepherd as impending disaster closes in.
Life isn't always sunshine and rainbows. But if you have an umbrella, a nice warm jacket, and a guide to lead you through inclement weather, you can be more confident in your personal financial journey.
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PPG-5006448.1 (10/22) (Exp. 10/24)