Jack Cranefield (author of The Success Principles) believes that highly successful people are particularly capable of influencing outcomes by controlling their own reactions to events, rather than controlling the events themselves. And I think he’s on to something!
It’s impossible for individual people to control large-scale events (i.e. the stock market, politics, or traffic). But, we can control how we react to these events. This means that the outcome of any event (positive or negative), is influenced by how we react to it.
When investors experience a down market, they have an opportunity to react in either a positive or negative way. Unfortunately, investors often react in ways which worsen their outcome. Some may react by changing the investment philosophy or by chasing market returns. Others may react by selling their investments while they are down. These kinds of negative reactions will inevitably result in negative outcomes. When an investor chooses a negative response rather than a positive one, they fail to achieve a positive outcome.
Event + Reaction = Outcome
As I’m sure you remember, last quarter was particularly volatile. (The S&P 500 lost 13.52% in the last 3 months of 2018.) It’s often my job to help investors with the reaction piece of the equation. Here is some information that I shared with many of our clients last quarter… The chart below was created by Eric Nelson, CFA of Servo Wealth Management. Here he shows the worst 4 quarters for an all stock global portfolio since 1995 and then contrasts the loss to the 12-month return that immediately ensued in both stock & bond markets**.
When the market falls in value, as it did last quarter, many investors choose to sell stocks and buy fixed income (bonds or cash). But this chart suggests that severe downturns like the 4th quarter of 2018 are typically a buying opportunity for stocks. History has shown that selling out of a market that has already fallen in value can be the wrong reaction at the wrong time.
Event + Reaction = Outcome
Feel free to email or call me if you’d like to discuss what the appropriate action should be for you. I look forward to hearing from you!
-Heath Hightower, CFP®
*Adapted from “E+R=O, a Formula for Success,” The Front Foot Adviser, by David Jones, Vice President and Head of Financial Adviser Services, EMEA.
*Jack Canfield, The Success Principles: How to Get from Where You Are to Where You Want to Be
**Stock Allocation = 21% DFA US Large Company (S&P 500) Fund, 21% DFA US Large Value Fund, 28% DFA US Small Value Fund,
18% DFA Int’l Value Fund, 12% DFA Int’l Small Value Fund, rebalanced annually.
**Bond Allocation = DFA Five-Year Global Fixed Income Fund