This week the S&P 500 officially entered correction territory, defined as a pullback of 10% or more, and it is feasible that we could approach a bear market (losses of 20% or more). While market corrections can be stressful, they’re a perfectly ordinary part of stock market investing, and this is something we’ve been expecting as markets have climbed ever higher the past few months.
Despite the stress of the current correction, I have been proud to have a few calls from clients wondering if they should “buy the dip”. This fits perfectly with my frequent admonishment to be fearful when others are greedy and greedy when others are fearful (a phrase I’ve borrowed from Warren Buffett). However, it’s also important to remember that true success in investing doesn’t come from needing to beat the market or anticipating the next big trend. Investing success comes from establishing a framework for your financial decision-making process. Not having a process in place often leads to event-driven decisions, rather than process-driven decisions. The danger arises from failing to suppress an innate need to do something for the sake of doing something.
This is the same emotion-driven thinking that causes soccer goalies to almost always dive off to one side or the other. Despite the clear statistical advantage of staying put in the center, only about 6 percent of goalies actually choose to do this. Why? Because they feel worse if they fail standing still—worse than they feel if they fail diving. They make an emotion-driven choice, and it takes a lot of effort to alter that impulse.
Unfortunately, this also works against us as investors.
To combat these types of emotional reactions, we’ve implemented an evidenced-based approach rather than relying on our approximations of what we feel will happen next. The result of our approach is a process designed to help you achieve your goals and invest with an adequate margin of safety.
While a bounce seems likely at this point, I expect the steady flow of coronavirus-related uncertainty to result in continued volatility (and anxiety). To help combat emotion-driven thinking, it can be helpful to not watch the news headlines too closely. The media has no qualms about playing to your emotions with dramatic headlines, illustrations of panicked traders and images of red monitors and negative numbers everywhere. Remember that the media’s objectives are very different than yours. Their goal is to get readers and attention, not to help you reach your long-term goals.
If you have any questions, please don’t hesitate to call the office at 317-537-PLAN or schedule a meeting. I am here to help you reach your long-term goals and we’ll continue to invest using a disciplined investment process and will make trades to position portfolios into down markets opportunistically when an adequate margin of safety is present.
Have a great weekend!