Well, it’s happened again. On Monday, the Dow fell precipitously – nearly 1,600 points – before recovering slightly to close at 24,345. The loss, which news reports are calling the worst single-day point fall in history, landed at 1,175 points. The headlines sound bad, but are they really?
One of our responsibilities as your financial adviser is to help you put market news in its proper perspective, especially when the media is reporting particularly steep market declines like we’ve seen during the past few days.
We know, and we often talk about risk tolerance with our clients. Monday’s market performance serves as a perfect example how bad that feels. But take a deep breath. If we never had these types of risks, it would be unfair to expect to deliver long-term premium returns to those who are patient.
In his book, “Your Money and Your Brain,” personal finance columnist and author Jason Zweig explains what is going on deep inside our heads during falling markets: “Step near a snake, spot a spider, see a sharp object flying toward your face, and your [brain’s] amygdala will jolt you into jumping, ducking, or taking whatever evasive action should get you out of trouble in the least amount of time. This same fear reaction is triggered by losing money – or believing that you might.”
In short, our amygdala, which Zweig refers to as “the hot button of the brain,” is a welcome ally in keeping us away from many of life’s threats. But it often plays against your best financial interests. Whenever you see bad market news, it’s best to assume that your instincts are going to spur you into panic mode long before rational thinking kicks in. And if you try to have a one-on-one showdown with them, your impulses just may get the better of you.
If you work with AMDG Financial already, you know that the investment plan we created with you can help you withstand just these kinds of rough patches.
We add ongoing value to your financial well-being in other ways, too, during fair times and foul. For example, that plan I referenced did not take place in a vacuum. We include the following in our approach:
- At the beginning of our relationship, we work closely with you to assess your long-term goals, and what it was likely to take to achieve them.
- We build your portfolio based on your goals as well as our evidence-based understanding of which investment strategies are expected to work best, and which are more likely to fail you during scary market downturns or giddy surges.
- We meet with you periodically to revisit your goals and your progress. If circumstances change, we work with you as warranted to ratchet up your expected returns or tamp down your risk exposure (while also seeking to minimize any trading costs or tax ramifications involved).
As such, we believe that the market risk that is intentionally built into your portfolio – and that you are being forced to endure at this time – should not be taken as a sign that “something is wrong.” Rather, we believe it is a sign that your portfolio is working as planned.
Your plan was never intended to eliminate all risk or guarantee certain returns. We designed it to offer you the best, evidence-based odds for personal success. Our aim is to help you strike a reasonable balance between minimizing the market risks that you would rather avoid, while moving toward the financial goals you would like to achieve. As Behavior Gap author Carl Richards once tweeted, “You don’t hire a real financial advisor because you aren’t smart enough. You hire one because you aren’t an objective 3rd party.”
Instead of fixating on negative headlines and down-sloping red arrows this week, I recommend focusing on another form of self-care instead. Take a yoga class. (I’ve been doing hot yoga at Hot Yoga Detroit for about a year, and I find it helps me a lot.) Treat yourself to a massage. Try meditation. When the news makes you feel panicked, just breathe deeply. Your mantra in a market downturn shouldn’t be “sell!” It should be “Ommm…”