Market Jitters & Missing the Elevator

Market Jitters & Missing the Elevator

Market Jitters & Missing the Elevator

Fear is a funny thing. We tend to not feel it when it would actually be a useful emotion to feel. And we often feel it when it’s counterproductive. When it comes to investing in the stock market, this paradox has played out time and time again. Investors don’t usually express jitters and nerves as stocks ascend to new all-time highs during a bull market rally. But following a market correction and the resulting paper losses, investors tend to be scared of further damage and worst-case scenarios.

Some of the more seasoned investors, however, are beginning to learn from their past “mistakes”. They’ve lived through the dot com bubble bursting, the 9/11 attacks, the Financial Crisis, and the “COVID Crash” of 2020, and they’ve decided that perhaps the time to be fearful is when things are going well. Because, it seems, the other shoe is always there waiting to drop, and it’s very painful to the psyche of a retirement fund saver to see their account balances shrink, even if they don’t need those funds currently.

Enter the jittery retirement saver. You can’t blame them. This is how we’re wired. When we experience an assault on our senses, our species is programmed to look for the evidence that signal another attack is imminent. When we see it or hear about it, we’re bound to go on high alert.

But there’s a problem. Since the advent of the modern stock market, every single downturn in prices was followed by an offsetting, and usually swift, recovery in prices. Not most of the time, not some of the time. Every. Single. Time. Want proof? We are sitting (once again) at all-time highs on the S&P 500. So then, what is this negative outcome we fear so much as human investors? If our goal is to have funds saved for the long-term so we can start living on a small percentage of the savings each year, why does it matter if our balances periodically decline?

The answer is simple. Every instinct we have tells us the decline may not be temporary. No matter how many times we see it recover, this time might be different. Consider this: I hate elevators. I know the odds are good (incredibly good) that the cable won’t snap and I will avoid plunging to my death in some dark cavern below the building I’m visiting. But I just don’t trust the mechanism. Maybe I’ve seen too many Die Hard movies?

Imagine you were ascending a 100-story building in the only available elevator. You reach the 40th floor and the elevator stops. People get out. You don’t realize this was the highest floor selected on the keypad, and so when the doors close the elevator starts descending. You aren’t expecting this, and for a moment you think you’re falling. Sweating, you get off at the 30th floor and decide to wait things out. But the elevator goes up again. Without you. You realize you may be waiting a while and now you’re late for your meeting.

Of course, the elevator will eventually return. But this happens to stock market investors too. The market elevator declines, and it frightens some more than others. Some may even decide to get off the ride for a while. The danger for those who get off is that the elevator may never come back. During the “COVID Crash” the Dow Jones Industrial Average dropped from about 29,000 to 18,000. Some decided to get off. Since then, the “elevator” has been “going up” and currently sits close to 35,000, an all-time high. Those left waiting for it to come back down have two choices. Keep waiting and praying for a crisis which would require a nearly 50% drop in prices to get back on at their current floor (assuming they had the guts to get back on during a period of turmoil). Or turn around and take the stairs by using bank CD’s or fixed annuities to grow their money. They’ll get there, eventually. But they’ll be very late for their meeting.

It can be said that long-term investors face 2 main risks: Short-term market declines which bring psychological pain, but no real damage if they don’t sell. And sitting out during an increase (the elevator leaving without them and never coming back). This is sometimes referred to as the risk of being too conservative.

What has gone unsaid to this point is that the stock market could possibly decline and go to zero. And never recover. This is possible. Just like that cable could snap on the elevator. However, when one considers what type of real-world scenario would have to play out for this apocalyptical stock market hypothetical to play out, they have to wonder if brokerage account balances would even matter at that point. Kind of like what the life of a pre-Zoom business-person might look like if they refused to fly on a plane or get on an elevator. They definitely wouldn’t die in a plane or elevator accident, but they also wouldn’t have much of a career.

Our advice has always been to make 1 of 2 decisions: Hold stock market exposure for a long period of time and ride out the ups and downs. Or avoid the stock market all together and accept a slower pace toward your goals (the stairs) without any short-term psychological pain. We all have to choose a mode of transportation and accept the risks. If you look for it, there is ALWAYS a reason to get off the elevator, you just have to accept the risk of being left on the wrong floor.

Mike Wren

Mike Wren

Mike Wren, CFP®, CDFA® is the CEO, Managing Principal and Financial Advisor at Legacy Financial Strategies. As Legacy’s managing principal, he draws on over 23 years of experience in financial planning.