Our Meridian Points newsletter comes straight from our President and Founder, Tom Coulter, who has worked extensively in retirement planning, taxation, estate and financial planning and investment management.
KEEPING CALM AMIDST CALAMITY
“Investors can survive a bear market the same way hikers survive an encounter with a bear: Remain calm and don’t make sudden moves. With some modifications, the National Park Service’s advisory on how to behave if you come across a bear in the wild is a surprisingly useful guide for investors as well.” – Jason Zweig, WSJ April 3, 2020
My mindset for the financial mess caused by COVID-19 is Be Calm and Stay Well. You are more likely to experience long-term financial success if today you focus on being healthy and maintaining a strong mental outlook.
History does not repeat itself, but it does rhyme. Let’s look back upon three previous financial calamities we have lived and learned through:
2. The Events of 9/11: The attacks killed 2,996 people and injured 6,000 others. The stock market was closed four days and fell more than 14% in the first week after re-opening. The fires at the World Trade Center were not extinguished until December 20, 2001, exactly 100 days after the attack. The Dow Jones Industrial Average was down 15% in the year to follow.
3. The Financial Crisis of 2007-2008: This is the granddaddy, considered the most serious financial crisis since the Great Depression of the 1930s. The crisis began in 2007 with a collapse of housing prices and the subprime mortgage market in the United States, after peaking in October with the Dow exceeding 14,000 points. It then entered a pronounced decline, which accelerated markedly through autumn of 2008. Unemployment skyrocketed and average US housing prices declined by over 20%. An international banking crisis developed when the investment bank Lehman Brothers failed on September 15, 2008. By March 2009, the Dow Jones average had reached a trough of around 6,600. US stocks then entered the longest bull market in our nation’s history, ending just recently in March of 2020.
Warren Buffett famously proclaimed, “The stock market is a device for transferring wealth from the impatient to the patient.” Looking back at these prior events, it is easy to see how those who were patient did very well financially while the unfortunate, impatient folks sold and suffered.
It is much harder to stay calm and stick to your plans in the middle of today’s Corona disaster. This is not because COVID-19 is worse than previous calamities. This is because your mind is not wired very well to thrive when under financial duress. Numerous academic studies have demonstrated that investors are extremely sensitive to short-term losses, which can lead to panic selling. Also, I have noticed that those folks who express despair over longer-term goals (e.g., “I was planning on a comfortable retirement”) are more at risk for selling near the bottom during market declines. Google “myopic loss aversion” to learn more on this subject.
I am not predicting anything except that the US economy will recover over time. During a large market drop, the most important thing to do is not obsess over the news. Staying glued to the TV’s talking heads and frequently checking the market on your phone can make you more impulsive and emotional, and therefore more likely to panic sell.
Many of you are quarantined, spending extra time with family. This is excellent timing because talking, playing games or even binging Netflix with your family will take your mind off stock market volatility. Use this time to improve your perspective and give yourself permission to be calm in the face of uncertainty. You are healthy. Do not obsess over the stock market. This will enable you to find financial peace now and make you richer later on!
Tom is President and co-founder of Meridian Trust &
Investment Company. After graduating from the University
of Tennessee, Knoxville, in accounting with honors in 1978,
Tom worked for international accounting firm Deloitte. He
later joined the financial medical advising firm, FIS
Associates, before founding Meridian Trust in 1997. Tom has
worked extensively in retirement planning, taxation, estate
and financial planning, and investment management. He is
an inactive Certified Public Accountant and Personal
Financial Specialist (PFS).