Black Monday May Feel Like the First Time – But it Wasn’t

Black Monday May Feel Like the First Time – But it Wasn’t

By A. Scott White, CFP®, ChFC®, CLU®
President, Scott White Advisors

Remember the song, “It Feels Like the First Time” recorded by the rock group Foreigner? When markets opened several percent lower on March 9, 2020, some investors panicked, reacting like it was the first time that had happened. But it wasn’t the first time—and it won’t be the last.

Black Monday and Stock Market History

March 9, 2020 is now known as Black Monday, when markets opened several percent lower, having declined during the preceding two weeks due to the COVID-19 outbreak and the falling price of oil.

We’ve seen similar times in the past. Twelve years ago, in September 2008, the near collapse of the U.S. financial system began. The stock market declined an additional 40% by March 20091.  Home values dropped, an additional 500,000 more mortgage foreclosures occurred than were anticipated,2 and 5.5 million more American jobs were lost than were predicted in a September 2008 report by the Congressional Budget Office.2

Risk Tolerance Questionnaires May Contribute to Panic

Historically, the stock market has crashed (a 20% drop or more) every few years. Why do people panic when it happens? Perhaps the financial industry itself causes some of the panic. Rather than learning about a family’s needs and then designing an investment portfolio to meet those needs—both expected and unexpected—many so-called financial professionals build investment portfolios based on a client’s answers on a “risk-tolerance” questionnaire. Clients often assume that the questionnaire will provide the financial advisor the ability to use his or her knowledge to build an investment portfolio so that the client will experience a level of pain that’s tolerable during times of stock market crises like Black Monday.

In my opinion, risk/return questionnaires often result in clients experiencing a higher level of pain than they were expecting when markets crash—resulting in panic and often leading to clients abandoning a suitable investment strategy to relieve this pain. This often results in clients not being able to meet their goals over the long term.

Black Monday—like the 2008 crisis—reaffirmed what Scott White Advisors has always preached: Don’t panic, don’t try to time the market, and a healthy dose of stocks makes sense for most long-term investors. While these simple lessons may seem obvious at first glance, I can assure you in times of stock market crises, each lesson often comes into question. And I can understand why. We humans are emotional creatures. Studies have shown people make their most important decisions in life based on emotion and then try to justify those decisions using logic.3 After all, it’s a disheartening emotional experience for an individual to review  their monthly investment statements and see their lifelong savings shrink month after month and continue year after year. It’s only human nature to do something to relieve the pain.

We don’t use risk/return questionnaires at Scott White Advisors. Instead, we build investment portfolios only after completing a comprehensive financial plan designed to help achieve the family’s goals and objectives. The plan includes a written investment policy statement that takes into account both the family’s short-term and long-term goals and objectives. We acknowledge there will be times when clients might experience pain when portfolio values decline, but we also recognize that changing a portfolio in crisis can often result in the family not being able to meet their identified goals. It might be painful, but we encourage our clients not to panic, because their portfolio was built knowing stock markets occasionally crash—and they also rise again.

Don’t try to time the stock market. Some believe it is possible to buy stock market investments when markets are trading low and then sell their stock market investments before stock markets crash, believing they’ll know in advance of any coming crisis. But it would require a magic crystal ball for anyone to predict what’s going to happen in the future with certainty. Because even if a model could be developed to predict why a stock market might go up or down, it would only take one unexpected global crisis—such as COVID-19—to cause that thesis to be invalid.

Planning for the Unexpected

There’s one thing I know about the future: The unexpected frequently happens. That’s why, at Scott White Advisors, we don’t build investment portfolios based on events that may or may not happen. We build investment portfolios with the understanding that stock market crashes do happen. Whether stock markets are down or up, we want to have a high level of confidence our clients can meet their goals and objectives.

At Scott White Advisors, when the next stock market crisis occurs, we will not panic or try to time the stock market by selling out of it. We understand panic and trying to time the market often result in clients not being able to meet their  goals. Instead, we’ll remind ourselves of the valuable role stocks play in protecting our standard of living from the devastating effects of inflation over the long term. We understand that sometimes long-term gains are worth short-term pains.

Don’t panic.  It may feel like the first time, but it isn’t the first—and it won’t be the last.

 

1“It was a Gutch-Wrenching Trade, but Investors who Bought the Day before Lehman Failed are up 130%”, Michael Santoli, CNBC, September 10, 2018.

2“The Cost of the Financial Crisis”, Phillip Swagel, PEW Economic Policy Group. April 28, 2010.

3“The Role of Emotion in Economic Behavior”, Scott Rick and George Loewstein, Handbook of Emotions, Third Edition, 2008.

 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Scott White Advisors and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will  prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.