At Presidential Wealth Management, we help our clients who become concerned when they see headlines about market declines that don’t necessarily tell the whole story. Here are three examples of such headlines for the February 5, 2018 decline in the stock market. They seem to follow the, “if it bleeds, it leads” approach to many newsrooms.
Dow Plunges 1,175 — Worst Point Decline in History (CNN)
Dow Ends Wild Day Down 1,175 points, Largest Point Drop in History (USA Today)
Wall Street Plunges, S&P 500 Erases 2018’s Gains (Reuters)
Need to Focus on Percentage Loss
From these headlines, an investor would believe that yesterday’s (February 5, 2018) decline was monumental, and a significant concern. But in percentage terms – at a negative 4.60%—this one-day drop in the Dow doesn’t even make it into the top 20 one-day percentage losses (it’s the 25th such decline, in percentage terms, since 1960). Probably a headline saying “not even a top 20 Dow loss” wouldn’t grab people’s attention. Of course, the Dow Jones Industrial Average—the Dow—is just one measure of the stock market. With it being near an all-time high, every 1% decline is reflected in a higher number of points, versus even a year ago (and even more than 5 or 7, or more, years ago). The saying, “there are lies, darn lies, and then there are statistics” comes to mind when looking at these headlines.
2018 Gains Erased!
For this part of what can be viewed as misleading investors—regarding the severity of the market decline—are the comments about this year’s S&P 500 gains (a broader indicator of the stock market, versus the Dow). Sounds disastrous! But, we only are five calendar days into the second month of the year. That is like sports announcers exclaiming all is lost for a football team, when they’re trailing behind the other team after only six minutes into the first quarter. If someone tried to use these headlines in a trial, the court could exclude them as evidence because they would create unfair prejudice, confuse the issues, or just mislead the jury.
Oh Yeah, that Volatility Thing
We quickly became spoiled, with 2017 seeing a relatively calm market, albeit with steadily increasing values. Clearly, we shouldn’t have expected this calm to last forever—in other words, it wasn’t a “new normal.” Many believe such volatility is the result of—or at least is exacerbated by—computer-based program trading, which is performed by a few large brokerage firms.
Manage Expectations BEFORE Negative Markets
Days like yesterday are why we at Presidential Wealth Management help our new clients understand the up and down nature of the stock market, and the tricky influence it can have on investors—individual and institutional—if they aren’t prepared for it, and don’t know what to look for. We can’t control the market, but we can control how we react to it. But this is difficult for most people, because they are self-directed investors (i.e., have no financial advisor), or have advisors who succumb to the same emotions. It is this very help where we feel we provide the most value to our clients.
Don’t Panic Alone
We encourage our clients to contact us the second they are concerned about the markets, or their wealth management program. This could be something you read about, hear about, or see on your statement. Worry can snowball if left undiscussed, to where rash, and often costly, decisions are made. Even if you have an advisor, and ever are concerned, feel free to contact us. We won’t charge you to review market or wealth management concerns with you—this is why we became advisors.
Lessons from Past Large Market Losses
When the market goes down even 10%, a noticeable percentage of investors, and their advisors, will take a large amount of their money out of stocks. But the problem is that they typically don’t put the money back into stocks until well after the market has swung back. This is the residual impact of the fear emotion—where they have to make sure the market won’t go down again. But then these investors missed out on the market rebound. Again, we can’t control the markets, but we can control how we react to the markets.