Talking you off the Ledge

February 1, 2016 3:56 pm

Betsey A. Purinton, CFP®

Managing Partner & CIO

January was an exceptionally rocky month for stocks. But our clients have been remarkably quiet, calling us infrequently about the markets. Have we done an extremely good job of educating them not to panic? Or have they just come to accept volatility’s drama? Or, are they simply very busy and ignoring the negative sentiment pervading the media? This week we’ll know more. Monthly statements come out, and since it was a down month, we may field some of those missing calls.

But before you pick up the phone, keep reading: I’ll be addressing some of key concerns and feelings that volatility can elicit.

Even the most sophisticated investors can feel disappointed and anxious when their statements show a drop in value. It is okay to feel nervous or even angry. This is your money after all — every penny of it. Nobody likes to lose. Sometimes we just like to vent and hear someone tell us that we are going to be okay, even though we might already know this deep in our hearts.

While it is the long term that matters, market reactions are all about emotional responses to short term price movements. We need to work through our emotions before we can ask ourselves the all-important question:  “Am I invested the way I should be?” If you are, there is a very good probability that dramatic market moves like we saw last month won’t ruin or even dent your long term financial plans.

If you are feeling nervous, you are probably going to voice your anxiety by saying:

  1. “I can’t afford to lose this money!!” This statement is true if you need to spend most of your money now, resulting in realized losses from forced selling. But most people spend down their portfolios gradually, enabling them to weather good times and bad.Proficient financial planning should provide you with a solid cash reserve (or a conservative allocation) that you can tap for expenses while your stocks are recovering. If you have been putting off building that reserve, now is a good time to start.
  1. “Ahhhh! I am down $20,000 (or some equally large number) this month.” Nominal losses feel larger than percentage losses, because it is easier to wrap your head around a dollar figure than it is to calculate what a percentage point means. But if $20,000 represents a very small percent of your portfolio, as large as the figure might feel, you are highly likely to see offsetting moves of that magnitude in the opposite direction in the future. We often feel the loss of $20,000 much more than we appreciate a $20,000 gain.
  1. “I can’t go through 2008 all over again!” We have published two blogs recently on our outlook for the economy and an explanation of what is making the markets so jittery. To repeat, we do not feel that our economy is about to fall into a recession, nor that we will experience another 2008 style credit crisis. Nor do we see that there is a bubble ready to burst, similar to the over-extension of technology back in 2000. While the volatility we saw in January was sparked by both real and perceived economic issues, we believe our economy can work through these concerns in the coming months. That said, we expect this bumpiness and negative investor sentiment to last a while longer, as some of the issues deserve continued monitoring.

What is important to remember is that the US stock market goes up on average 70% of the time, which means that the longer portfolios remain invested, the better chance you have of making respectable profits. It is also interesting to note that a ten percent pullback has happened approximately once a year, typically requiring eight months to fully recover (JP Morgan Asset Management). Volatility, as painful as it feels, is part of the investing landscape.

Going to Cash
Very occasionally a client, who is feeling particularly nervous, calls from the “ledge” and wants to go to cash. While going all to cash may provide immediate relief, it is a particularly detrimental strategy for most investors. Unless you are 100% convinced (and will remain convinced) that you are not comfortable being an investor, will not need to invest, and will not venture back into the markets again, it is unlikely that you will achieve the peace of mind you seek by fully jumping ship on risk assets.

The main difficulty of going to cash is that it is extraordinarily challenging to time your return to the markets. You are unlikely to feel good enough to reinvest your cash until the market has achieved most of the next round of gains, likely dooming you to selling low and buying high.

Morningstar research shows that over the last 20 years (1/1/1996 to 12/31/2015) investors who stayed 100% in the market (S&P 500) experienced average annual returns of 8.19%. Missing the 5 best days in the market reduced that return to 5.99%; missing the best 20 days resulted in only a 2.05% annual gain. Investors swung to negative returns when they missed the best 30 days. And being out of the market during the 60 best days resulted in a negative annual return of (-5.53%). Investing should not be an “all or none” venture.


That does not mean you simply have to “hang in there.” There may be a good reason to change the level of risk in your portfolios. Or you may want to move some assets around, such as creating a bigger cash reserve for yourself. Or you may simply want reaffirmation that you are doing the right thing in your portfolios.

If you have an advisor or wealth manager, the best strategy is to call him or her before you make any major decisions. Your advisor can listen and acknowledge how you are feeling and help you determine if there are any risks to your current or future lifestyle that require changes to your investment strategy.  Just having the conversation may make you feel better.

We all feel pulled by emotion when markets plunge. But our fears are often more tied to what money represents – such as security or success — than it is to the markets themselves. That means our focus should be on our longer term financial plans, not short term market performance.   As long as we remain on track to meet our retirement or lifestyle goals, market volatility should not be a big focus of our attention.

Betsey A. Purinton, CFP® is Managing Director and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.