Despite the market plunge, Im quite pleased that not a single client has called so far. Probably because they know my answer would be to work through the pain in order to profit from this market correction.
Is this the beginning of the third half-off sale of the century? I really dont know, which I tell my clients is the key to successful investing -- knowing that we dont know. Accepting this fact requires us to ignore all of the predictions by experts who, in good times, typically predict more good times and, after market plunges, predict more bad times.
In times like these, we should advise clients to have perspective. As of the time of this writing, U.S. stocks are down just under 5% for the year, as measured by the Vanguard Total Stock Index Fund ETF (VTI), including dividend reinvestments. In my book, thats not exactly the definition of a market plunge. After six consecutive up years, we tend to expect more of the same which makes us think we are more risk tolerant than we really are. In reality, as stocks get more richly valued, a correction or bear becomes far more likely. Thinking in terms of what has happened over a few days ignores any long-term perspective.
While I dont know the short-term future of the stock market, I tell clients I know something almost as important. If markets really do plunge, I know people will panic and sell, repeating the same mistakes made after the tech and real estate/financial bubbles popped. The good news is that this creates an opportunity for investors to buy when stocks are on sale. Data is very conclusive that individual investors underperform markets by roughly 1.5% annually by poor market timing. Our clients shouldnt be victims -- rather they should be the beneficiaries of buying when the herd is selling.
The bottom line is that we should tell our clients they have a choice to be investors or speculators. Speculators think they know the future and repeat the buy high and sell low pattern of the herd. Investors embrace the pain, keeping a balanced portfolio, and use times like these to buy stocks when the herd is selling. Our job is to help clients understand the difference.
Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for various AARP publications and has taught investing at three universities.
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