The Markets Are Falling. What Should I Do?

Every few quarters, we find ourselves running through the same muster drill. Something happens somewhere in the world, the markets go a little crazy, and they sell off a dozen per cent or so of their value. The usual suspects panic.

 

Eventually things stabilise. And everyone wonders what the hell just happened. Post-mortem explanations come along that seem reasonable (after the fact, of course, never before).

 

The phones ring with clients wanting an explanation on the volatility. “What’s going on in the markets, should I get out?” they say. My response is always the same, “You won’t like my answer: This is what markets do, they go up and down, sometimes violently”.

 

As I write, U.S. markets are down about 8% per cent for 2016. European markets are off by about the same amount, and China, whose market crash started the downturn, is down 12 to 15 per cent.

 

Given this week’s surprise, and how it cascaded around the world, it is as good a time as any to discuss what you should, and should not do during a crash. (Cut out this column. Read it again when the next one comes along).

 

Markets rise and they fall with shocking regularity, as do market corrections and crashes. They may not stick to schedules as tightly as the solar system does, think seasons, sunrise and sunsets, moon phases, even the appearance of comets, but they do move in semi-regular cycles. Between 1950 and 2014, half of all annual periods saw a correction of 10 per cent or worse. From the August highs to the time of print, U.S. markets are down (surprise!) about 10 per cent. Don’t be shocked if in two, four and six years from now, those markets also see a 10 to 20 per cent correction.

 

Bull and bear markets come along on their own timelines, stay for as long as they like, then move on. There is not a whole lot you can do about it, except recognise that it happens.

 

Do not give in to your gut, which might cause a momentary lapse in judgment. Remember, your “flight or fight response” is what causes that knot in your stomach, sweaty palms, accelerated breathing and elevated heart rate. The discomfort is a feature, not a bug. This agitation is supposed to crank up your body and make it ready to react to danger.
 

It would do a terrific job keeping you alive during a war, but works against you in the capital markets.

 

Adrenaline is not the basis of sound portfolio management. The reason you made a long-term plan in the first place is because you do not need access to the money you’ve invested in the next year (or the years after) but decades from now. In 2025, you will not care what the market did in January 2016.

 

The short term always seems to get in the way of the long term. I’ve heard countless stories from investors who panicked out of the market in the March 2009 lows and never found their way back in. They missed out on a huge climb in value. That’s not sticking to a plan, and it’s not what good financial planning looks like.

 

Are you agitated, freaked out, stressed? Is the market keeping you up at night? Notice the subtle difference between reacting emotionally to external stimuli and that nagging feeling that you forgot something important.

 

At times, your body may be telling you something. Is your portfolio in sync with your own risk tolerance? Are you carrying more exposure to high-risk assets than you are comfortable with? Have your circumstances changed but your portfolio has not? Try to be perceptive to when your subconscious is trying to get you to notice something. It could be important.

 

Decisions made to “stop the pain” are the ones you eventually regret. The time for action is when you are in a thoughtful and calm state of mind. Any significant financial decision you make should be circumspect, carefully considered and according to plan.

 

If you are merely reacting to the latest market moves, then what you have is not a plan, you have an instinctual, fear-driven reaction, and it’s the makings of a disaster. Do notice the panic around you. Watch the reactions and overreactions of the guests on financial television. How emotional and strident are they? Can you see them sweating?

 

There was a time during the great financial crisis when I could tell how much the market was down that day merely by listening to the commentators on Bloomberg or CNBC. There is a feedback loop from markets to

TV anchors and back. See if you can spot it (just don’t become affected by it). 

 

You lack the skill, the discipline and the ability. Even if you get lucky, it’s just dumb luck, and serendipity is likely to encourage you to engage in even more reckless and foolish behaviour in the future.

 

The odds of you jumping out on time and getting back in are stacked against you.

 

Do look for signs of capitulation. Market bottoms are made when a critical mass of investors fold, throw in their cards and panic sell. See if you can spot the moment when everyone finally cries “uncle”.

 

The day-to-day action is noise, unless you are an active trader doing this for a living. You will lose money treating investments like trades and vice-versa. Do have a sense of humour about this. My favourite thought on this came from a fund manager, who, in the midst of a nasty sell-off, was asked by a fellow trader how he was doing.

 

“Sleeping like a baby,” he calmly replied. “Really? Given this crazy market, how can you sleep like a baby?” the first trader asked. “It's easy!” he said. “I wake up screaming every two hours, wet myself and cry for Mommy.”

 

That sort of gallows humour is typical on Wall Street. But if you follow the good advice above, you can sleep soundly, knowing your portfolio is working for you.