Financial Planning Fridays #93: Predicting Market Declines
Using a First Trust chart of global crises over 55 years, this episode argues that market-moving events cannot be reliably predicted, and that selling long-term stock investments in reaction to scary headlines typically harms returns. The market has recovered and advanced through every past crisis despite the fear at the time.
Using a First Trust chart of global crises over 55 years, this episode argues that market-moving events cannot be reliably predicted, and that selling long-term stock investments in reaction to scary headlines typically harms returns. The market has recovered and advanced through every past crisis despite the fear at the time.
Key takeaways
- Major crises that triggered declines were impossible to predict in advance.
- Selling long-term stock holdings in reaction to headlines has repeatedly hurt investors.
- Markets have recovered and gone on to new highs after every historical crisis shown.
- Staying invested through frightening news has rewarded patient long-term investors.
This great chart from First Trust shows just a few of the global crises over the past 55 years. Each of them was a major news story at the time, likely causing the market to temporarily decline, and unfortunately causing many of our neighbors to sell their long-term stock investments. We’d like to discuss two important things that this chart brings to mind. First, we were not able to predict any of the events listed here. We did not reach out to a single client ahead of these events and recommend that they sell their long-term investments because we believed a market decline was about to happen. The events on this chart include the start of wars, natural disasters, global pandemics, terrorist attacks, election results, bankruptcies, and bank failures. We were not able to steer our client’s portfolios around any of these temporary declines. In fact, we are not aware of anyone who is able to accurately predict the future, and until that changes, we would certainly not throw out our long-term investment strategy because of something that may or may not happen in the future. Second, as you can see from the chart, the market has always bounced back from each crisis, and temporary decline, and then gone on to move higher over time. In fact, we are close to an all-time high at the time of filming this video. We may not have been able to steer your portfolio out of harm’s way, but we certainly did our best to take advantage of each crisis by rebalancing and adding to stock during each one! As a reminder, we do this by remaining committed to our disciplined investment strategy that includes rebalancing most of our clients’ accounts when the S&P 500 increases or decreases by 5% from our last rebalance. After 23 years advising clients, we can’t think of a better way to handle market volatility and these inevitable temporary declines. Over the past 55 years, $10,000 in the S&P 500 has turned into more than $2.6 Million and each crisis turned out to not be something to be avoided but an opportunity to invest more whenever possible. The famous investor, Peter Lynch said it best in a 1995 interview: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” Thank you and we look forward to talking with you again soon. Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.
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