Stock market declines may be normal and expected but they are anything but a pleasant experience. Over the past twenty-five years of my career I have had hundreds of conversations about what it feels like to experience a market decline. I’m talking about first-hand experience, actual money invested in the markets (as opposed to hearing or reading about it). These conversations were meant to prepare new investors for the inevitable experience that awaits all capital market participants. I realize, even as I write this, that telling a person what to expect and having them experience it are on separate planes, emotionally. Nonetheless, I will continue my endeavor at setting realistic expectations for I believe it helps to “clear the fog” for those who lack experience when in the midst of falling prices.

The following is a culmination of my quarter-of-a-century of experience describing what it’s like to endure a stock market decline and the general nature of things surrounding the event.

• The news is bad, bad, bad. The twenty-four-hour-a-day news cycle that we now live with can be emotionally taxing most any time but especially when stock prices have fallen. Don’t expect to turn on the TV or radio and be told to be calm, that history has demonstrated time and again that declines are temporary, that well designed financial plans should not be derailed by riding it out. Don’t expect to pick up the newspaper and feel more calm when you are finished reading it. DO expect to hear how “it’s different this time” and you can’t compare this to the past. It’s important to understand that financial journalists are professionally inclined to connect recent events to movements in stock prices, regardless if a strong correlation exists or not. If history is a good indicator, the headlines will begin to turn positive just in time to miss most of the next recovery.
   
• You may feel disenchanted with your advisor. More than once I’ve heard someone say, “that’s what I pay an advisor for, to keep me from losing money in times like this!”. I believe I’ve always been upfront about my prognosticative shortcomings; yet I understand the fear and frustration. These are difficult times for investors. A good place to begin is to explain that advisors are compensated for providing assistance (advice, tools, resources) towards achieving a client’s long term financial objective(s). This can include helping a client determine realistic and achievable goals towards asset accumulation, retirement income, college savings, wealth transfer, etc. This process is normally followed by designing an investment strategy that attempts to provide the highest probability of success in achieving these goals. Once the goals have been established, agreed upon, and the investment strategy has been implemented, the advisor should monitor the program over time to make sure it remains on track. Periodic reviews with the client are helpful in checking progress, gathering additional information (including any potential changes in the client’s life) and discussing current events (like stock market activity). Some modifications (or adjustments) to the plan can be expected with long term goals. These are the services that I believe advisors are best equipped to provide and consequently compensated for. Your advisor will not be able to accurately forecast the beginning and end of market declines, thus the need to factor them into the plan. Having a clear understanding of the “value added” by working with a professional advisor is important early in the relationship. If you are ever uncertain as to what you should expect from an advisor, simply ask.
   
• The gold ads will be everywhere. Yep, like clockwork. The stock market is in decline, the world as we know it is ending, buy gold! Let me start by saying (with all of the humility I can muster) this, I believe, is a bad idea. First, take a look at the historical volatility of gold before considering it as a solution for an unstable stock market (do your own research here, don’t let some gold pusher provide the answer). I think that is all it will take to quench that temptation. If not, consider the logic in gold being used as currency in the twenty-first century. As of yet nobody has been able to explain this logically. So we buy gold because we fear the stock market will crash and the dollar will no longer be a viable currency. In a world where we use automatic bill pay, ATM machines, credit and debit cards, direct deposit and (now) Apple pay, we are somehow going to start paying our utility bills and purchase groceries with gold? Will we take a gold bar into the store and shave off just the right amount to pay for our goods? I don’t see it. The target audience for gold ads is the doomsday believer and like a knight on a white horse, they are here to save the day. I prefer a much brighter outlook and an investment in the capital markets which can allow the investor to participate in the potential growth of thousands of viable companies around the world.
   
• You will want it to end, immediately! This is only natural. Nobody likes to look at another statement that shows lesser value. It’s important to remember that nothing “wrong” is happening when the stock market declines (a decline is the “other side” of volatility). It’s easy to forget how markets work (including grain, soybean, produce, oil markets, etc.) when you feel it’s not “working”. Markets contain buyers and sellers and their activities cause prices to move up and down. The stock market seems to possess certain exceptions to what would otherwise be considered standard practice. First, it’s one of the few places where some people run away when prices fall and second, it’s considered to be behaving abnormally when it behaves exactly as it has for nearly a century.
   
• You may feel embarrassment. Choosing to maintain your long term investment strategy during extended market declines may not be viewed as “wise” among peers (particularly those who are not seasoned capital market investors). You’ll likely suffer through someone boasting that they sold all of their stocks before the decline (at which I often respond by asking them to let me know when they feel it’s a good time to buy back in). There is no doubt in my mind that volatility is the cost of a premium rate of return and the stock market has delivered consistency on both levels throughout history. Some believe it’s necessary to avoid the declines while participating in the gains to achieve a premium return. My research (along with years of experience) leads to the opposite conclusion; those who “market time” tend to fare worse where return is considered.
   
• You may change your definition of risk. I learned a long time ago that rather than eliminate risk, we more likely just trade one type for another. For example, when we move funds from an asset class that contains volatility and uncertainty (like stocks) to another that provides principle stability, we may have eliminated market risk but at the same time likely took on inflation risk (the risk that our asset will not maintain its current purchasing power). During a market decline risk is often measured by the value on the statement rather than in terms of the longer term objective. By selling and avoiding any further potential decline, has the individual improved or lessened the probability of reaching their eventual objective? Staying focused on the longer term objective is very important when considering major changes to the investment strategy.
   
• You may lose sight of your goals. If your financial plan has integrity, stock market declines have already been built into the anticipated result. In other words, normal declines should not derail a well prepared financial plan. What is normal? The best way I know to derive at normal is to look at the more recent past. The average intra-year stock market (S&P 500) decline since 1980 is -14.20%1. With this information readily available and verifiable, I find it interesting how much attention lesser declines receive. Some investors are ready to throw in the towel on their financial plan long before we even reach the average. It’s important, as part of the value-added, for an advisor to keep track of the plan’s probability of success to make sure it is still on track when the statement value seems to suggest otherwise. There are some wonderful tools that advisors are able to use to assist in tracking and monitoring a client’s progress. 
   
• You may need to change your information source(s). I’ve stated before and will here again, if your source for information is weakening your conviction in the capital markets (and your investment portfolio) then I would advise to eliminate that resource. In my experience, investors with the strongest conviction are more likely to have the more positive experience as long term investors.
   

One of the great ironies in life is we are taught (often by experience) that many of the best things in life do not come our way easily, we can expect there to be trials and tribulations. Despite having this knowledge, it’s human nature to seek the path that is more comforting (less resistance). When our emotions are being stirred by fear, it can trigger an out of character response. One that may be regretted later. The best way I have found to respond to an emotional situation is to let logic and research influence the decision I am about to make. If my emotions are still running high, I’ll find something to do that will force my mind to move on to something else.

I feel it’s important to end this topic by letting new investors know that the feelings described above usually fade with experience. Seasoned investors are less likely inclined to react to a stock market decline in a way that would be detrimental to their long term financial goals. It is a fact that many look at these declines as short term opportunities to invest additional shares at reduced prices.

We can’t predict the future but we will continue with our best efforts to teach our client’s from what we have learned from the past and to keep our eye on the ball (the client’s longer term goal). 

- Rick O’Dell