Lifeboat Drill No. 1


About six weeks ago as I write this, the big news was the sharp decline in world markets, including the U.S. stock market, lead by a 9% drop in Chinese market valuations. Although I received only a couple of calls, I’m sure that the drop caught most clients’ attention, especially since the dip began just in time to show up on February statements. At the time, it was hard to tell whether that dip was the beginning of long-term (secular) trend or just a temporary hiccup. At the moment, it would seem to have been more of a hiccup as much of the downward fluctuation has been recovered, but time will tell. I think most clients with whom I have talked have been comforted by the fact that, despite the dip, overall account performance has been positive since the first of the year.

That said, now seems like a good opportunity to put last month’s dip in perspective and to use it as a reminder that what goes up (as most asset classes and indexes have done over the last four years) can AND WILL go down, and that as long term investors, we all need to be prepared for those inevitable (although sometimes painfully long-lasting) market adjustments.

A little bit of history might be helpful. In the US, markets have historically declined 20% (yes, 20%!) about once every 3-1/2 years. When this happens, it has taken – on average – about 11 months to recover that lost ground, although sometimes it can take a few years. The last time we saw such a decline was October of 2002. A broadly diversified portfolio – especially one that has a fixed income component – might expect to see not so deep a decline and not quite so often, but as long-term, primarily equity-owning investors as you and I both are, it is worth keeping in mind that these declines are an inevitable and unavoidable part of the investing experience. Period.

In my experience, the only investors who need fear for their long term economic well-being as a result of such corrections are those who have inappropriate and undiversified portfolios (these people generally aren’t my clients) or people who react emotionally to bad market conditions and end up making the worst decisions at the worst possible time (hopefully not my clients either). So, when (and note I didn’t say “if”) the next big correction comes – and I mean bigger than we’ve seen in quite some time – know these things: 1) It will be difficult to watch, but that is exactly what you must do; 2) you have a broad and well-diversified portfolio, one that is appropriate to your specific situation, and nothing that happens in the market will change that fundamental fact; 3) your planning time horizon is longer than you think it is – even if you’re already retired; and 4) there has never been a market correction which did not recover, and I’m sure that the next one, when it comes, will be no different.

In closing, you may have heard me say that I think in decades not years because I don’t care if you have more money a year from now, but I do care that you have more money a decade from now. Thinking this way eliminates almost all of the unnecessary gut wrenching and wasted thinking about “what should I do today given what’s going on right now?” The short answer is, and almost certainly will continue to be, “do nothing; stay the course” especially since the course we have chosen together is a prudent one.

As always, please let me know if you have any questions or if there is anything I can do for you.