It’s natural to be worried during a time like this. You wouldn’t be human if you turned on the news, or checked your portfolio, and felt nothing. As humans, it is hard not to feel angst and fear during these uncertain times. Given that these feelings are completely normal and expected, the question then becomes how do we harness and control them?
The unfolding tragedy in Ukraine is simply appalling. The events overseas are not only having an impact on our hearts, but also our portfolios. Fear breeds rash decision making. Rash decision making breeds volatility. This is a recipe for keeping you up at night.
However turbulent things may seem, these temporary drawdowns are normal. In an average year, the market has a 5% drawdown four times. Even more surprising is the fact that there is a 10% drawdown once per year. My point is, these temporary declines are normal and expected in any given year and nothing to be afraid of.
Now, I know the wheels are spinning in your head and you are thinking, “this time it’s different.” But, what has history taught us?
In 1962 during the Cuban Missile Crisis, the market had an initial drawdown of 5%. In the six months that followed, it was up 21% and 12 months later it was up 26%. When the Soviet Union invaded Afghanistan, the market had a drawdown of 3%. Six months later it was up 6% and 12 months later it was up 26%. When the War on Terror started, the market pulled back 3%. In the six months that followed, it was up 19% and then 27% 12 months later. Want me to keep going? Ok, only because you asked. Finally, when the Russian Federation invaded Ukraine (the first time) in 2014, the initial market drawdown was 1%. Six months later, it was up 8% and a year later it was up 12%.
PSA: Markets go up and markets go down. The decisions you make during these temporary declines can determine the outcome of your retirement. To change our decision-making process, we need to change how we think about volatility and temporary declines.
Remember, you only lose money if you sell. Any red you see in your portfolio is an unrealized loss unless you take action. Say it with me again…you only lose money if you sell. Furthermore, this can and should be viewed as an opportunity to buy the great companies of the world on sale.
When buying a car, you don’t call the manager over and demand to pay full price. When shopping for gifts in December, you don’t turn your nose up at the clearance rack. So, when our investments experience a temporary decline, why aren’t we beating down the doors to buy more?
This too shall pass. Volatility is normal. Declines are temporary. You only lose if you sell.
It is ok to be worried during a time like this. Our feelings of angst and fear are completely normal. However, how we harness and control those fears could literally dictate the outcome of our retirement.
As always, if you want to chat with me further about this, please give me a call.
Have an amazing weekend, turn off CNBC, and stop checking your accounts.
Sincerely,
Brian
LPL Tracking #1-05255410
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.