No, You Didn't Just Lose
I don’t worry when the market drops, and I make sure my clients don’t either.
I can schedule and prepare so much of the financial planning process like tax and estate planning, cash flow and debt management, and building retirement income plans. But when it comes to market downturns, all I can do is warn clients. I can’t tell them when, why, or how. I can just tell them that eventually, their investments will drop in value.
During bull markets, I constantly remind clients that market corrections are inevitable. The response is often the same: “Vince, we know. Our investments will drop occasionally. We get it. Don’t worry, we won’t panic.”
Some won’t. Plenty will. It only takes one headline or one comment from a friend to spark worry.
So when markets fall, I contact my most anxious clients first. I don’t want them worrying, so I urge them to invest more (so long as it’s within their risk tolerance, of course). No action is a win, but investing more? That’s a big win.
Sometimes I get agreement, but with conditions: “It’s going to get a lot worse, Vince. Let’s wait until it drops to X.” Hey, at least they don’t want to sell anything (or worse, sell everything).
A few will say, “I’m not worried, but what if Y happens?” But what if Y doesn’t happen? As my wife likes to say, when you worry, you only suffer twice.
And then there’s the response I want to focus on - the one I hear most often:
“I just lost a bunch of money. I don’t want to invest more.”
There are three important things to remember here:
- Losses aren’t locked in unless you sell. A drop in value isn’t the same as losing money. It’s quite literally how volatility works. Remember: volatility is the price of admission for long-term returns. You don’t lose money when your house assessment comes in lower, and you don’t lose money when stocks temporarily drop in price. Unless you sell.
- Don’t anchor to past prices. Anchoring happens when you fixate on a past price, like your investment statement from three months ago, and then let that that distort your decisions. Waiting for prices to ‘get back’ to a certain number before investing more is a trap. Ask yourself: if you didn’t know the previous high, would you still hesitate to buy today?
- As your assets grow, the dollar swings get bigger. A 10% drop on $500,000 is $50,000. A 10% drop on $5 million is $500,000. The percentage is the same, but the dollar amount feels a lot scarier. But the same is true for growth. A 10% gain on $5 million is a life-changing $500,000. The math works both ways. And remember: the market goes up much more often than it goes down.
If you’re reading this and you’re concerned, please give me a shout.
