The Inevitable Stock Market Cycle

Published 11/7/2017 in the Maryland Daily Record

I have been thinking a lot about the inevitable cycle of the stock market. For a while, it has felt like we are in a period where the market is lulling people into a sense that things aren’t cyclical anymore but are in fact in a new state of permanence. The expectation that each monthly or quarterly statement will show an increased balance along with waning interest in the subject is evidence of the general mindset of investors today.

There have been other periods throughout my career as an investment adviser where this experience played out, and, as anyone may recall, these things always do revert to the natural, healthy pattern of self-correction. Looking back on those periods throughout the ’90s and 2000s, the media played a significantly greater role than what is occurring now. This has something to do with the emergence of the 24-hour news cycle back in those times compared to today, where there is a bit of media exhaustion on the topic of market events. That said, when stocks start to go down, I believe we will see a resurgence of media market share in people’s interests and attention.

This attention to the media and the influence this has on investors is something that investment advisers struggle to combat. We work around the clock to prepare clients and their portfolios for the inevitable fluctuations that come with being invested in stocks. Many of us are focused on the very long horizon of a client’s lifecycle which has no influence on the short-term fear that can set in during a difficult market period. As an example of how we communicate with clients around this topic, we provide a brief point of view to share that is included in their quarterly review material that our clients received last week.

We added this note to the beginning of the review packet:

“As time goes on and the stock market continues to go up, up, up … we are aware of the natural cycles of the markets that eventually lead to a time when things will go down. While we expect that the pullback will be temporary in nature, it is inevitable that this will happen. The big question is … when??? The when is the tricky part that none of us know. However, we do have a sense of what it will feel like when it happens and want to share this with you to help prepare.

“When the market finally does have this pull-back, the media will be all over it – it will be big scary headlines about the end of stocks. These fear-based media messages will be nonstop and they will be in our faces wherever we turn. The media will make it seem like the downturn will be forever and short of that, will be for a very long time. …

“The reality is that the downturn will be temporary, how long, we don’t know. We expect that it will be sharp and quick … and then things will get back to chugging along …

“Rest assured, your portfolios are built for this! Having a healthy cash reserve partnered with a diversified portfolio is crucial to sustaining and maximizing long term growth.”

This commentary caused a few clients to reach out, though many did not. I take this as a sign that clients have been educated on the process of long-term investing and that they have confidence in this process. At least this is my hope, as most any adviser genuinely does want this same peace of mind for clients.

This is where the challenge of the media and headlines come into play. Consider the very different interests of the investment adviser, who is focused on supporting clients through difficult market events to remain invested, and the media companies that are focused on selling content. Fear sells – big time. The longer and grander the headlines, the greater impact on people’s buying patterns around media consumption. These talking heads in the media are never accountable to the people who tune in, so the fact that they are right or wrong is of no consequence. Compare this to the accountability we have as investment advisers, eternally and appropriately, accountable.

Try to remember these words of caution when the market does inevitably go through a difficult time. And remember that tuning out the headlines and doing nothing is the best decision someone can make as a long-term minded investor.

—Dorie Fain, founder and CEO of &Wealth