4 Reasons the Stock Market Works…Even Now
This may seem like an odd topic right now, but there probably isn’t a better time to talk about the market than when it is down and highly volatile. Remembering how markets work, and why, goes a long way to calming nerves, and calm nerves make good decisions. With that thought in mind, let’s think about the stock market from a few different angles.
Reason #1 – Market responses are understandable
Rapid market declines display investors’ collective response to a sudden negative event. Natural disasters, economic downturns, and geopolitical events happen quickly and without advance notice. The market tends to respond in kind. These are natural responses; no different than your reaction when, say, driving your car. When something unexpected happens, you slam on the brakes and swerve to avoid a collision. Your coffee spills and everyone in the car is jostled around. In this analogy, traffic is the market, and you don’t shake your fist at our system of roads. You are angry with the fool who cut you off. Think of market declines as a type of defensive driving.
We know markets respond this way, and Sequoia is here to help keep you confident on the road.
Reason #2 – Markets demonstrate the reality of risks and rewards
I vividly remember riding roller coasters with my grandmother when she was in her 80s. Even though I was 10, I can still see the attendant pulling the bar down to lock us onto “The Beast” while people looked at her with heads tilted sideways. You don’t get that same adrenaline rush riding the “Old Tyme Taxis”.
It is important to remember that even with extreme market volatility, there are ways to seek to protect yourself. Diversification ensures that you aren’t putting all your money into a single company’s basket. Asset allocation spreads investment across different industries and countries. There are certainly ways to invest that push the possible returns even higher, but they come with equally sharp risks.
At Sequoia our job is to make sure we strike the appropriate balance between risk and reward for you. And remember – we shouldn’t be any more surprised when markets take a sharp decline than we are when the coaster roars down the hill.
Reason #3 – Markets have helped people reach goals for years
One of the most under-discussed and remarkable features of modern society is widespread and systematic investing. Think about it: people all over the country plan – not hope, but plan – to retire and live for another 30 years without working. They save money in 401(k) plans and IRAs every month so that decades into the future they can stop working with plenty of time to travel and enjoy time with family.Even more remarkable is how quickly it has become the default position; an afterthought.
My father-in-law taught for over 35 years, and it wasn’t until the last 15 that he even considered investing. There wasn’t a mechanism to make it easy and accessible. Now, nearly everyone has a 401(k), and with increasing regularity you must opt out if you don’t want to participate. Undergirding all this investment is our stock market. Regular Joe’s share in the profitability and growth of the largest companies in the world. The stock market helps send kids to school, enjoy retirement, and leave a legacy when we are gone.
The market is at work all around us, not in theory, but in practice. Sequoia is here to help you make the most of these tools for you and for future generations.
Reason #4 – You choose how to use markets
Whether you view a market downturn with a sense of dread or see it as a stock-buying opportunity, you are in charge. The same mechanism that recognizes a company’s steady earnings growth must react to rapidly changing conditions. The extent to which we participate is up to each of us, and to put it bluntly, we can’t have our cake and eat it too. If you want to arrive at your vacation condo in Tampa in less than 3 days, you must take the interstate with its 70 mph speed limits and possible delays. But you are welcome to avoid all of that and take backroads, where speeds are slower and it’s less stressful. It will just take a lot longer to get there.
Sequoia knows you can’t be an expert in everything, and we are here to help make sense of your financial life. From investing what you’ve spent your life saving, to navigating the ever-changing tax landscape, and preparing your estate for the days when you are gone. Money is simply the tool we use to do the things we want to do, but it is important to manage those tools and take care of them. That’s what we are here for.
Disclosure: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.
Stock investing includes risks, including fluctuating prices and loss of principal.