A favorite part of our job is the close personal relationships we develop with our client families. When Randy and I attend industry conferences and confer with other advisors across the country, we do not always hear the same feedback. We realize that our situation is unique, and for that, we are grateful. With that being said, we want to emphasize that our robust client e-mail communication is not intended to replace client conversations but to supplement client conversations. During times of market volatility, “space and repetition” are vitally important.
Over the past few months, we have had a lot of conversations with clients about the volatility in the markets. We thought it helpful to share five (5) common misconceptions about market pullbacks along with some conventional wisdom for each incorrect assumption.
Misconception #1:
“If my account keeps going down like this, I will be out of money in the next few years!”
Conventional Wisdom: There is an old “wise tale” in our industry of an advisor talking with a client who, in mid-February, says to the advisor that “at the current rate of loss, I will be out of money in six months.” The advisor replies that with two feet of snow falling last night, it will likely be 80 feet thick by August! This was the advisors way of saying that nothing lasts forever. Humans are linear thinkers, but markets (and weather) do not move in a linear fashion.
Misconception #2:
“I don’t see prices going down anytime soon. I am afraid that this rampant inflation is going to be around for a LONG time.”
Conventional Wisdom: There are a handful of government agencies that formulate their own inflation data. For simplicity, let’s say that inflation was at 7% in August 2022. Many people think that prices need to go DOWN 7% for inflation to get back to zero… this is not true. All government agencies track inflation on a year-over-year basis. This means that they will compare the 7% in August 2022 to August 2023. If prices are up 1% in August 2023 above the August 2022 figure then inflation will show as 1%. We do not need prices to move lower for inflation to get under control… we just need prices to stop increasing. We believe this process has already started.
Misconception #3:
“It is pretty clear that there is a recession coming in the next 12 months… I think we should get out of stocks and wait until the dust settles to get back into the market.”
Conventional Wisdom: The stock and bond markets are forward looking markets. This means the markets are pricing in what is EXPECTED to happen over the next 12 to 18 months. In our humble opinion, the market has priced in a mild recession in 2023. This means that stocks are down based on that assumption. Since the markets generally move BEFORE the real economy, waiting to get back in the stock market “until the dust settles” means that you will likely miss some of the recovery.
Misconception #4:
“I have lost a lot of money this year in the markets. I am not sure I will every recover these losses.”
Conventional Wisdom: You have not “lost” anything until you sell your position. We also do not recommend benchmarking the progress of your portfolio against the highwater mark over the past few years. We encourage clients to “zoom out” and look at your investment results over the last 3, 5, or even 10 year periods. This is another example of why dividend stocks are so valuable for retired clients. They do not have to worry about if/when a recovery is coming if they are only spending dividend income generated from their portfolio.
Misconception #5:
“My statement last month was down. I am considering cancelling my vacation to cut back on expenses until this market recovers.”
Conventional Wisdom: Your monthly statement will NOT provide any comfort, confidence, or clarity during a market correction. The 3 C’s (clarity, comfort, and confidence) come from trusting your Live Well Plan. As many clients remember, your Live Well Plan is your financial roadmap for the rest of your life. Our Monte Carlo simulation plans for and builds in market downturns before and ALSO during retirement. Want to review your Live Well Plan? We think you will be pleasantly surprised with the results. Why? Because history never repeats itself but it often rhymes and markets have always recovered.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
Content Is Nothing Without Context
Are you looking for a weekly financial market commentary that provides context? Sign up to receive our weekly commentary HERE. We are helping make the complex simple.
Equity securities may fluctuate in response to news on companies, industries, market conditions and the general economic environment. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
AdTrax 4766787.31 Exp 10/24