How Expecting Market Corrections Can Ease Your Worry
Imagine someone embarking on their first ocean cruise. They are aboard one of the big ships that circle the Caribbean and they are expecting nothing but sun and calm seas.
In fact, this person has built their expectations entirely on imagery from the cruise company's website and social media feed. Not surprisingly, the company has never posted a video of wind-blown rain sweeping the sun deck or seas that are choppy enough that you can feel the motion as you walk around the ship.
Now, imagine how our first-time ocean cruiser is going to feel when the ship sails through a minor squall. Since the foul weather was never in their expectations, a few hours of dark skies and rising waves might seem like the end of the world.
On the other hand, an experienced passenger will know that the occasional rough sea is just part of cruising. When the weather turns rough, you apply your motion sickness patch and go enjoy all the things to do below deck.
Expectations make a huge difference in how you experience less-than-ideal situations. So, it makes sense that your expectations for the stock market's behavior can largely determine how you experience periods of volatility.
If you've been told that "smart" investments are ones that only go up, when they go down, you assume they're not smart investments after all and you rush to sell.
But if you expect your portfolio's growth to be punctuated by periodic price declines, you're less likely to feel panic and the need for impulsive action.
We live in an era where a 2% drop in major market indexes triggers red letter headlines in our news feeds and dire predictions from the experts. Yet, since the early 1950s, the S&P 500 index has experienced drawdowns of 5% or more in 92% of those calendar years. And in more than half of those years (55%) there's been a market decline (or so-called correction) of 10% or more.1
Still, over that entire time period, the S&P 500 has seen an average annual return of more than 10%.2
It's no fun when your portfolio or your cruise ship encounters rough conditions. But being prepared ahead of time, and realizing that "this too shall pass," can help lessen the anxiety and second-guessing that can lead to self-defeating behavior.
When creating your long-term plan, your trusted advisor has built in the kind of diversification designed to help stabilize your portfolio during significant corrections, as well as the flexibility to make changes to keep your risk exposure on target.
Additionally, he or she is available to talk with you when the market goes through periods of volatility (like we've been seeing this year) to help ease your worry and encourage you to stay on track for long-term success. If you have questions or concerns, be sure to reach out before making any major decisions.
Sources:
1. http://go.pardot.com/e/91522/y-of-loss-in-the-stock-market-/97bwdk/3111502738/h/6UO4_ix47Yhd2HB_X0lNMONclXruOZNSkn-rLFcIHEY
2. http://go.pardot.com/e/91522/erage-annual-return-sp-500-asp/97bwdn/3111502738/h/6UO4_ix47Yhd2HB_X0lNMONclXruOZNSkn-rLFcIHEY
Disclosure:
The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’) and Family Legacy Advisors, LLC (‘FLA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA and FLA portfolios may contain specific securities that have been mentioned herein. EA and FLA make no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.