Staying Calm When the Market Drops

On the morning of February 24, 2022, I woke up early to check the news on the CNBC app. A red highlighted banner flashed in front of me: “Dow Set to Open Down 800 Points.” Not a good start to the day. I knew I better be ready for a long one. The fear of losing money would be palpable in our clients’ voices, and despite my own anxiety and concern for retirees, I knew I needed to be a grounding source for the people who rely on us.

During the COVID-19 pandemic, the market corrected and there was plenty of fear amongst everyone. Fear-mongering was palpable every day when I stepped into my office. My manager at the time gave me a piece of advice that I reminded myself of on the morning of the 24th. His advice was simple: as a financial advisor, you have to remain calm and be empathetic. You can’t give in to the hysteria. People look to leaders during times like this. Be the leader they need and guide them through the rough seas of investing. It was a great piece of advice, and at the time it changed my outlook on how I could be a better advisor. Looking back now, his words, along with living through that particular market correction, gave me the confidence I needed to truly help clients during downturns.

As expected, that Thursday was an incredibly busy day. I could sense everyone’s fear, frustration, and concern. I remember when one of my clients asked me if I thought we were going to war. This was just prior to Russia invading Ukraine, and I told him honestly that I didn’t know. Throughout the day I talked to many clients — some rational, some fearful, some in between. Regardless of who was on the other end of the phone, I had to make sure I kept myself calm and grounded.

The main questions I received that day all revolved around the same fear of the market slide: What should I do? Should I go to cash? How can I run and hide from the market? How can I protect my money? I think I may put my money in a stable fund and just earn interest — what do you think? What about gold? These are all fair questions, and ones advisors routinely face when the market is in a downturn. In my own mind, going to cash was also risky, and probably not wise for the long term.

It’s important to note that when the market is in a downturn, emotional factors like fear can cloud rational thinking and lead to irrational decisions that negatively impact a financial portfolio. While going to cash may seem like a safe haven, going to cash actually carries its own risk: inflation risk, sometimes called cash buying-power risk. Here’s an example. In June 2022, inflation climbed to 9.1% — the highest it had been in 40 years. Meanwhile, the average savings account was paying just 0.08%. Your money may look good not going down, but it’s losing purchasing power to inflation every day.

Here’s another example. Let’s say you have $15,000 invested. The market corrects and you decide to sell at $10,000 — you’ve just locked in a $5,000 loss. Now you don’t want to lose any more money, so you move the cash into savings paying 0.08%. That’s $8.00 per year in interest on your money. If inflation stays at 5% over the next year, your $10,000 will be worth about $9,523.81 in real terms. You would have lost another $500 — better than $5,000, sure, but at 0.08% annual interest, it would take you roughly 900 years to double your money back to $20,000. Nine hundred years is nine lifetimes if you lived to 100 — a long, long time to make your money back, and that’s before accounting for inflation eating away at it along the way. While going to cash may feel safe, it still carries real risk.

So what do you do? Not everyone has the same financial situation or goals, so you have to look at the individual, their needs, and their wants before suggesting anything. That said, most people are better off staying the course and keeping a long-term perspective when investing. When you do that, you’ll usually ride through the market’s downturns. If you look at the history of the Dow Jones Industrial Average, it’s safe to say that gains in the market are permanent, while declines are temporary. [Dow Jones Industrial Average historical chart from original article] Source: Yahoo Finance.

Market corrections are never fun. Nobody wants to see their money decline — nobody. But if you can stay rational and invest for the long term, even in retirement, you can often find stocks being sold at a discount and participate in the gains as the market recovers. Sometimes, you just need to hold on. That said, it’s also fine to keep some money in cash. A balanced portfolio can absolutely include dollars sitting on the sidelines. It’s the extreme of selling everything and going all to cash that tends to be the most damaging to a financial plan. Finding balance is often the winning strategy. Thanks for reading! — CFEFinances.com