What Will Derail the Bull Market?Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on September 8th, 2017
With the news unendingly focused on calamity – terrorist attacks, political discord, and military threats, to name a few recurring themes – many investors understandably get concerned about whether the current bull market will continue. The worry, of course, is that a stock market crash or even a recession will wipe away much of the gains from the last several years.
If you’ve been following us for any period of time now, you know that we rely on historic evidence to support our view that markets will increase in value over the long run. Time reduces risk. The longer you’re invested in a well diversified portfolio, the greater the chances that you’ll achieve the returns you deserve.
The question is, when faced with the threat of the bull market reversing course and investments being impacted, how easy is it to stay calm and ride it out? In our experience, it’s not easy; fear and greed are powerful influencers.
The Cost of Panicking
Let's look at what can happen when investors panic during a crash and sell while investments are at a low with a fictional (but very real) case study from the financial crisis. As someone who had one eye on his impending retirement, “Alan” always kept up with the market, so when the Dow Jones Industrial Average (DJIA) started to decline after a high on October 11, 2007, he took notice.
By the time the DJIA had declined by 20%, in mid-2008, serious nerves had set in, and the sleepless nights caused him to start selling. The bear market started to reverse its downward trajectory in March 2009, and by 2010 Alan had the confidence to invest in equities again, but the damage had been done.
The chart below illustrates how Alan’s portfolio would have had a significantly higher value years later if he had simply been able to weather the storm rather and stay in the market rather than keeping his cash on the sidelines in 2009. It's a difference of approximately $200,000. Many investors remained on the sidelines for much longer than one year, causing an even greater difference.
History Repeats Itself with a Different Name
If you look back over the stock market corrections over your lifetime, such as the Kennedy Slide of 1962, the early 1990s recession, and even the ”Brexit” scare of 2016, they've all been temporary. And it’s important to remember that now, when markets are doing well, so that when the next stock market correction occurs, we have perspective on how it will likely have limited impact on our long-term goals.
You can't control the markets...
...but you can control what you choose to focus on! Rather than giving into that panic and selling your stocks, take a deep breath and think about the facts and figures.
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