Why We Don’t Panic When the Markets Are Down
The first quarter of 2022 has not been good to investors. As of early March, the S&P 500 index was down almost 12 percent year to date, most of it the result of pessimism over world events: Russia vs. the Ukraine, oil shocks, post-Covid supply shortages, inflation fears, and all the rest. In any crisis, “playing it safe” to avoid losing your money can seem like the only rational strategy. This is why many investors tend to bail out at the first sign of trouble, which of course sends the markets down even further. But over the past 60 years, we’ve seen repeating patterns of crises, and yet, the market has been resilient, and so far, has recovered every time. It’s why we don’t panic when the markets are down.
While it’s not predictive of anything, it is helpful to look at some historical “crisis events” for some perspective. The results might surprise you.
Cuban Missile Crisis
Sixty years ago we saw the Cuban Missile Crisis, when over a two-month period from August to October of 1962, the S&P dropped 9.9 percent. But one month after that crisis ended, it was back up 15.5 percent. One YEAR later, it had gained 41 percent. And five years after it hit the lows? The S&P had seen a 15.8 percent annualized gain.
Then we had the big market crash of 1987, known as “Black Monday.” The Dow Jones Industrial Average dropped 22.6 percent in a single trading session. Over the course of 17 days, the S&P dropped an astounding 31.5 percent. The world was ending, right? Nope. Just one month from the crisis low point, it gained 7.1 percent, and after one year, that gain had risen to 27.7 percent.
The Collapse of Lehman Brothers
More recently, we saw the collapse of Lehman Brothers in 2008. In a little over two months, the S&P was down an unbelievable 39.1 percent. But just one month after that crisis low point, we saw an 18.3 percent gain, and going out one year, the S&P was up 48.8 percent. After five years, the market saw an annualized gain of 21.5 percent.
And just two years ago, between February 12 and March 23 of 2020, the Dow lost a stunning 37% of its value, as the Covid pandemic suddenly burst onto the scene. On March 16 alone, the Dow plummeted nearly 3,000 points, losing almost 13 percent of its value – in just one day. And then, almost as quickly as it started, values began to creep up again. By August 18, the S&P 500 was back in record territory. The Dow finished the year up 7.2%, the S&P 500 was up 16.3%, and the Nasdaq composite index soared by a whopping 43.6%.
The point here is that large, sudden market downturns happen, and there’s nothing we as individuals can do to stop them. But we can control our reactions to them. When the market is going down and the news is depressing, the urge to panic and “play it safe” can be intense. But how you choose to respond to this turmoil can dramatically affect your long-term performance. Investors are more likely to find the courage to get back into the market after things quiet down; which means, by that time, they’ve already missed much of the recovery.
We don’t panic because we want to help you plan for market declines BEFORE they happen, rather than trying to react to a market drop afterwards. Remember, the stock market can drop by 20 percent or more for reasons you can’t even think of – and maybe for no reason at all. With 5-7 years of conservative Bucket 1 assets and maybe another 8-10 years of Bucket 2 assets, our goal is to “buy enough time” for the market to recover. That’s what a Bucket strategy is all about.
If you didn’t have a plan prior to these recent events or if you’d chosen to be more aggressive than what we normally recommend, that’s okay – just give us a call and we’ll discuss options with you for adjustments. As always, we’re here to help.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.
You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
S&P 500 Index is an unmanaged index and includes a representative sample of large-cap U.S. companies in leading industries.
Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
NASDAQ Composite Index is an unmanaged index and measures all NASDAQ domestic- and international-based common stocks listed on the NASDAQ.
An investment may not be made directly in an index.
Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.