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Perspective: Avoid panic selling in a volatile market

[Originally posted on our Member's Blog on 08/05/2011]

How did you hold up yesterday? Yesterday was a good example of panic selling. Don Hays offered this morning that the volume of declining stocks was 82 times that of advancing stocks on the Nasdaq index yesterday. That's extreme. So if you weathered yesterday pretty well emotionally, it's a good sign.

I think the reason people are so fearful right now is because things feel so out of control. Government seems to be making lots of decisions, but few of them seem like really good ones. We keep hearing that the economy is broken (though we're a long way from bread lines and shanty towns). We've been burned by the stock market twice in the past decade and people are worried that we're out of bullets to deal with another crisis. Things just feel unstable.

Maybe you feel this way. If so, I'm not going to tell you that everything is fine and you don't need to be concerned. Nobody knows what the future holds. It is possible financial panic is around the corner. As much as we'd like to, it's almost impossible to ever completely rule that out.

But before making the leap of (negative) faith (also known as worry) to that conclusion, let's ponder a less dramatic scenario.

Since 1928, there have been 26 bull markets, including the one we're currently/recently in. As this post from seekingalpha.com stated on April 26, just a few days before the market peaked, this current/recent bull was very close to the middle of the pack in terms of both length and total gains. A little over two years and right around a 100% gain. Very normal.

All of that is fine, but if the bull market length and duration we just experienced was normal, it stands to reason that hitting a bear market after that point would also be quite normal, right?

This isn't an argument to say we have flipped over and this will develop into a bear market. I don't know if that's the case at this point or not, and neither does anyone else.

Rather, the point I'm trying to make today is that even if this is the beginning of a new bear market, it doesn't necessarily mean this bear market is going to be catastrophic or historic. It could just be a "run of the mill" bear, in the same way that the last bull was fairly "normal".

And it could be that it's happening not because the world is about to end, but because this is what the market does. It cycles between bull markets and bear markets. I hope you understand that if you're going to be an investor over the span of multiple decades, you're going to have to weather a number of bear markets. Some will be longer and deeper than others. But they're going to happen.

You know what else? They're normal. That should be some comfort. You don't need to worry about them or freak out when they finally do arrive. Sure they're unpleasant, but so is getting your teeth cleaned at the dentist. You still do it (I hope). They're basically the equivalent of investing winter, and they come around just like the seasons.

A lot of today's investors came of age during the extended bull market of 1982-1999. That bull market was by far the exception to the rule. (And in fairness, even that bull market technically had a mini-bear in there. Remember 1987? The worst single day for the stock market ever when it plunged nearly 23% in a single day. Makes yesterday look like a picnic.)

Hopefully it's some comfort to take a deep breath and recognize that a bear market every 3-4 years is about the historical average. It depends on how you slice and dice the data, but that's more or less been the average over the past century. If this is a new bear, which I'm not quite ready to concede, it will be our third in twelve years. Hmm. Dare we say, not all that abnormal? That the first two were a bit more severe than average shouldn't be a huge shock, given the massive bull market that preceded them, and the fact that the last one coincided with a banking crisis, which is unusual and not in a good way.

As you go about your weekend, try not to worry about the market. Life is more than the food we eat and the clothes we wear, and our Father knows our needs and promises to meet them. (That may sound familiar, I didn't come up with it myself.) It could be that next week will be wild and nasty. But it might not be. It could also be that this is a correction that doesn't ever develop into a bear market, in which case you'll forget about this little blip faster than you can imagine. After all, how often do you think about last summer's correction? It was worse than this year's has been so far.

As always, we encourage you to stick with your long-term investing plan. Hopefully you followed our advice and developed one long ago at a time when your emotions weren't screaming at you. Trust that version of yourself — I can almost guarantee he/she is a better information processor and decision-maker than the version that's feeling panicky today.

[For more about a membership to Sound Mind Investing, click here]

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Posted by Matthew at 2:15 PM | Comments (0) | TrackBack
Category(s): Current Market Events, Economy
Tag(s): economy, market volatility

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