Whether you are a financial advisor, active trader, or casual investor, this week’s market turmoil probably has you feeling a bit stressed. And that’s okay. What’s not okay is acting on those emotions.
Everyone is stressed, including your clients; how you handle your clients in these tumultuous times is what matters. The most important thing is to just feel neutral, don’t let anything get to you. Get your emotions in check.
Chances are you’ve been preparing for this. You have a script for these circumstances. If you don’t, it’s time to write one. Remember, this is temporary. The market is just reacting to the impending trade war. We’ve all seen this before.
Stay calm, and put your game face on. Remember, a desperate salesman is a dead salesman. If you sound panicked, your clients will leave.
If you're the advisor, your clients pay you to keep your feelings out of it. On their own, they can give in to stress, greed or any other irrational impulse. Your job is to focus on the numbers and the long-term view.
No matter who you are, it is difficult not to react when you see the market take a sharp downturn. Humans are hardwired to feel drops in portfolio value more than equivalent gains, a phenomenon known as “loss aversion.”
“You need to look where you are at now versus where you started — don’t look at your peak,” says Patricia Jennerjohn, a certified financial planner with Focused Finances in Oakland, California. “If you look and see, ‘I’m down 2%,’ that’s the wrong perception.”
It’s true, Monday was the worst day for stocks in 2019. And it may have you thinking that after a seven-year bull run, we’re due for a pullback. “How long can this bull market last, anyway?” But any look at recent data will suggest this is just a blip, after all U.S. stocks are up 15% in 2019 and 38% over the past three years.
This week, trade tensions between the U.S. and China once again took a leading role, which has frequently been the case over the past year -- escalating tariff fears spooked the stock market. But we’ve all seen this movie before, yet the market still isn’t desensitized to the drama.
“This latest installment in the tariff saga is an additional signal that a full resolution to the trade spat isn't imminent,” explains Craig Fehr, CFA Principal, Investment Strategist at Edward Jones. “We've seen fits and starts like this over the past year, with a mix of retaliatory measures and constructive negotiations.”
Fehr reminds us that, “In August 2015, Chinese policymakers devalued the yuan, which, coupled with concerns of tighter Federal Reserve interest rate policy, sparked a 1,000-point decline in the Dow, initiating a 10% pullback in the stock market. One year later, the market had risen by 16%.” He also added, “More recently, in May of this year, rising tariff threats and fears of a trade war prompted a 7% pullback. Even with the Aug. 5 decline, the stock market is still 4% higher since then.”
So how do we cope with the stress of this round of stock market turmoil?
First of all, it’s important to keep a wider view. Market declines are always challenging, but investment has never been a day to day approach to wealth for you or your clients. The game is won in the long term. "Keep a historical perspective,” says John Alexander, Breazeale Professor of Finance at Clemson University in South Carolina. “Since 1926, the stock market has returned, on average, slightly over 10 percent a year ... and that takes into account the crash in the '30s.”
That means, don’t make hasty decisions. Think twice before you follow the herd. Avoid knee-jerk reactions. We’ve all heard this before, and this is the time that those time-honored cliches actually have meaning.
Stay cool under pressure. If you’re a buy-and-hold investor—which is the best kind to be—a dip in stock prices is simply an opportunity to buy more shares cheaply, which will give you bigger gains in the long run.
If you don’t want to buy that doesn’t mean you should start selling. If panic takes over and you decide to sell all of your stock in a market downturn, you will lock in a loss. At times like this, sometimes the best thing to do is nothing. As Paul Newman’s character said in Cool Hand Luke, “Sometimes nothing can be a real cool hand.”
You’ve likely been giving market advice for years, and you’ve been creating diversified portfolios heavily tilted toward stocks all along. Remember, If you stayed invested in equities since the market hit bottom in 2009, you would be up nearly 300% today.
The best way to cope with the stress of this market is to just take a walk. Research shows that even moderate exercise, such as taking a walk, has long-term health benefits. Taking a walk is a simple, no-stress way to reduce your future health care costs in retirement, as well as avoid damaging your portfolio.