Cowering Under Your Desk: Is This Your Plan for a Market Correction?

There will be a correction in the equity markets. When? No one knows. Not Warren Buffet. Not Bill Gates. Not the SEC, the NYSE or any financial firm. But there will be one, and it could happen next month, next year, two years from now, or three or five or ten. Having spent more than forty years in the industry, I can tell you one thing for certain, bear markets tend to happen when you least expect them.

The average annualized total return for the S&P 500 index over the past thirty years is close to 9.8 percent. ¹

Key takeaway: this is a total return which assumes all dividends are reinvested and furthermore is the average return before inflation. Unfortunately, the market didn’t go straight up, and there were many painful times of significant financial loss.

As so many of us know, the S&P had a lost decade, actually a lost thirteen years beginning in March 2000.  According to Wikipedia, the S&P 500 index hit an intraday high of 1,552.87 on March 24th, 2000. Then our friend the stock market turned on us and bit us hard. When the S&P 500 index closed on October 10th 2002 at 768.63, it had lost almost half of its value. In less than three years half the value of the U.S. stock market was wiped out. That’s a bear market.

Could it get any worse? Yes, it could, and it did.  There were some small rallies, but on March 9th, 2009 the S&P 500 index hit a thirteen-year low closing at 676.53. In those years the market lost almost fifty-seven percent of its value. What about financial advisers? Big losses there as well. By the time the market hit its low, almost fifty percent of FAs had left the business. ²

You know the rest of the story. The bull finally came out of the barn at the end of March 2009, began to run and on April 27th, 2018, the S&P 500 index closed at 2,669.91. So, for the last nine years, you have had happy clients. Very happy. Ecstatic almost. Stock market returns have been great.

 This is the time to remember an old expression on the Street: don’t confuse a bull market with brains. This isn’t to say you and your firm aren’t on top of the market and watching it carefully. But a bull market induces complacency. My question to you is this: what is your plan for dealing with your clients when the bear comes out of his cave?

Having lived through many a correction, I can say the most common reaction to bear markets by FAs is to cower under their desks and not speak to their clients. I wish I could say otherwise but I can’t. In fact, when writing this piece, one of my colleagues who had been a stockbroker in the crash of ’87, told me he became so tense as the market reeled that he couldn’t call his clients.

After attending an eight-session stress relief program at a community hospital, he learned how to reduce his stress levels and started calling his clients again. “Exactly as you said, I cowered under my desk.”

If you can avoid this behavior, in fact, do the opposite and become an aggressive prospector, you will open dozens of new accounts from HNW/UHNW clients. Why? When the bear comes out of his cave and starts growling, the noise will set in motion a huge amount of money. Where are these assets going? From one adviser to another. Will you get your share? If you are prepared and don’t freeze.

Remember, bear markets set money in motion. Position yourself so money will flow to you. Don’t give into fear and cower under your desk because money will not flow to you, it will flow away from you.

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Resources: 

1 https://tinyurl.com/CNBC-S-P-Avg

2 https://en.wikipedia.org/wiki/S%26P_500_Index

Contributing Writer: Subject Matter Expert Charles McCain